Gardner Intelligence Blog

Monetary Base Signals Peak Capital Equipment Spending Growth

December was the 10th-straight month of month-over-month contraction in the monetary base, which was $3.420 trillion, its lowest level since August 2013. The rate of contraction has accelerated almost every one of these 10 months, with December’s rate accelerating to -11.8 percent, which was the fastest since October 2016 and second fastest since August 1937. In fact, this was the fifth month in a row that the one-month rate of change in the money supply contracted more than 8 percent. That has never happened before. While the current contraction is a response to the unprecedented increase in the money supply following the Great Recession in 2008 and 2009 and is completely necessary, it does indicate that there could be unexpected and difficult-to-predict economic events in the future.

As a result, the annual rate of change in the money supply contracted for third month in a row, decelerating to -4.4 percent. This was the fastest rate of annual contraction since July 2017. The annual rate of change peaked in March 2018, indicating that the rate of growth in capital equipment consumption should peak between March 2019 and March 2020 as there is typically a long lead time of 12 to 24 months between changes in the money supply and changes in capital equipment consumption. That said, the lead time has shortened since the Great Recession due to the dramatic effects of the massive amount of money the Federal Reserve created to pump up the economy. 

Disposable Income Growth Unchanged for Sixth Month

In November 2018, real disposable income was $14,460 billion. As is normally the case, real disposable income set an all-time high this month, up 2.8 percent from one year ago. The month-over-month rate of growth was either 2.7 or 2.8 percent for the sixth consecutive month.

The annual rate of growth remained unchanged at 2.7 percent for the fourth month in a row. This followed five straight months of 2.8-percent growth. The annual rate of growth should stay at this rate for at least the next three, if not the next six, months.

The Gardner Business Index (GBI) finished December at 52.4. During the 2018 calendar year, the Index averaged 56.9, setting the highest calendar-year average reading in the Index’s history. The latest reading fell 5.9 percent compared to the same month one-year ago. Gardner Intelligence’s review of the underlying data for the month indicates that the Index – calculated as an average – was supported by supplier deliveries, production, new orders and employment. The components which lowered the Index included backlog and exports, both of which contracted.

Employment recorded a small expansionary increase while all other components moved lower during the month. Production and new orders both expanded at their slowest rates since late 2016 after peaking early in the year. The impact of slowing new orders and production has significantly altered the backlog picture which in the first quarter of 2018 recorded its highest reading in history before recording contractionary readings during the last two months of the year.

Housing Permits Grow for First Time since July

There were 101,700 housing permits filed in November 2018. While this was the second month in a row with more than 100,000 permits, November’s total was the second lowest since February 2018. Compared with one year ago, November’s permits increased 4.8 percent, which broke string of three straight months of contraction. However, the annual rate of growth decelerated for the second month in a row to 4.6 percent. This was the slowest rate of annual growth since May 2017.

In November, the year-over-year change in the 10-year Treasury rate was 41 basis points for the third month in a row, the the 10-year Treasury rate was relatively unchanged. With the Federal Reserve not raising rates at its last meeting and President Trump harping on the Federal Reserve for raising rates, could the rise in the year-over-year change in the 10-year Treasury rate be over? We will probably need a few more months to know the answer to that. 

Durable Goods Spending Growth Weakens for Third Month

In November, the month-over-month rate of growth for durable goods spending was 3.8 percent, which was the third month in a row that the growth rate was below the historic average of 5.5 percent. November’s rate of growth was the slowest since March 2016. The annual rate rate of growth was 5.9 percent, decelerating for the third straight month. This was the slowest rate of annual growth since February 2017. 

Low interest rates have helped boost durable goods spending as a percent of total consumer spending, but further deceleration in the rate of growth is ahead. Expect durable goods spending growth to slow through the first quarter of 2019. Beyond that, the trend in the growth rate will depend on whether or not the change in the 10-year Treasury rate breaks up or down out of its current flat trend.

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