July 24, 2018

On Wednesday, President Trump’s National Economic Advisor, Larry Kudlow, spoke at the Delivering Alpha conference in New York. In discussing next Friday’s GDP number, Kudlow said, “We are getting three (percent) and it may be four (percent) for a quarter or two.”  Kudlow also implied that more tax cuts are coming that might further boost GDP growth. Interestingly, Kudlow also said that “the Chinese government knows they’re wrong,” implying that President Trump would prevail in the current tariff spat.

Also on Wednesday, the Fed’s Beige Book survey of the 12 Fed districts was released. It basically said that the U.S. economy grew “moderately” from late April through May. The survey also said that “wage increases remained modest” and prices for goods and services rose “moderately” in most regions. Translated from Fedspeak, all those “modest” and “moderate” modifiers mean that the Fed is looking for excuses to postpone its next interest rate hike, since it does not see any significant inflationary pressure.

The best news is that the latest wave of tariffs has so far not had any significant economic impact. During Congressional testimony on Tuesday, Fed Chairman Jerome Powell said, “Overall, we see the risk of the economy unexpectedly weakening as roughly balanced with the possibility of the economy growing faster than we currently anticipate.”  Translated, Chairman Powell basically admitted that the Fed is now in “neutral” and may not need to tap on the brakes unless inflation materializes. Interestingly, the Fed Chairman only briefly mentioned the trade war between the U.S. and its global competitors, saying only that it is “difficult to predict” what the ramifications will be on the economy. So essentially, Chairman Powell admitted that the tariff spat might cause the Fed to hesitate before raising key interest rates further.

If the Fed is looking for another excuse to postpone raising key interest rates, it may be Wednesday’s shocking Commerce Department announcement that housing starts plunged 12.3% in June to a seasonally adjusted annual rate of 1.173 million, and building permits declined 2.2% to 1.273 million. This was a big surprise and the biggest percentage monthly drop in housing starts since November 2016. Economists expected housing starts and building permits to come in at an annual pace of 1.32 million and 1.33 million, respectively. Housing starts are now at their lowest level in nine months and building permits have declined for three straight months, so there is no doubt that the housing industry is cooling off.

The latest economic data tell us that the ‘Goldilocks’ environment of moderate interest rates, strong GDP growth, and modest inflation persists. The 10-year Treasury bond also remains very well behaved. Recent inflationary pressures are also moderating, so the Fed may post only one more interest rate hike in 2018.

Strong Retail Sales & Industrial Production Should Boost 2nd Quarter GDP

Outside of housing, the other economic indicators were stronger. The Commerce Department announced that retail sales rose 0.5% in June, but the real surprise was that May’s retail sales were revised up to a stunning 1.3% gain, up from 0.8% previously reported. In the past 12 months, retail sales are up 6.6%.

Due to higher prices at the pump, sales at gas stations rose 1% in June and are up a whopping 21.6% in the past 12 months. Vehicle sales rose 0.87% in June, but excluding gas stations and vehicles, retail sales still rose a very healthy 0.4% in June due to strong sales for Health & Personal Care (up 2.21%), Bars & Restaurants (up 1.5%), On-line (up 1.33%), and Building Materials (up 0.84%). Overall, the June retail sales report and the May upward revision were very positive for strong second-quarter GDP growth.

On Tuesday, the Fed announced that industrial production rose 0.6% in June. Mining rose a robust 1.2% in June, but mild weather caused utility output to decline 1.5%. Excluding the volatile utility and mining sectors, core industrial production rose by an even more impressive 0.8%. In the past 12 months, industrial production is up 3.8%, but the real exciting news is that in the second quarter, industrial production surged at a 6% annual rate, which bodes especially well for second-quarter GDP growth.

Crude oil prices went on a wild ride last week, as traders expected a supply surge due to the resumption of crude oil exports from eastern Libya. Furthermore, due to sanctions being re-imposed on Iran, Russia is widely expected to boost its crude oil production, especially after the recent Trump-Putin summit.

On Wednesday, the Energy Information Administration (EIA) announced that crude oil inventories rose by 5.8 million barrels in the last week after three previous weeks of dramatic declines. In light of these developments, it appears that crude oil is in the process of stabilizing at a relatively high level, which should insure that the energy sector should continue to generate steady profits for the next few quarters.

About The Author

Louis Navellier
CHIEF INVESTMENT OFFICER

Louis Navellier is Founder, Chairman of the Board, Chief Investment Officer and Chief Compliance Officer of Navellier & Associates, Inc., located in Reno, Nevada. With decades of experience translating what had been purely academic techniques into real market applications, he believes that disciplined, quantitative analysis can select stocks that will significantly outperform the overall market. *All content in this “A Look Ahead” section of Market Mail represents the opinion of Louis Navellier of Navellier & Associates, Inc.*

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