Introduction

Consumer spending is moving only modestly higher while consumer inflation is moving in the wrong direction, two less-than-stellar results from the first run of data on the second quarter. But one result is completely stellar and that's manufacturing which may finally be kicking into gear.

The economy

Manufacturing production jumped 1.0 percent in April for the best monthly showing in more than 3 years and a convincing reversal of March's weather-related 0.4 percent dip. Volumes began to show steady growth at the end of third-quarter last year, emerging from a long slump tied to the 2014 collapse in oil prices. Details show April gains for vehicles, consumer goods and business equipment. Had April not come through like this, the factory outlook would be much different.

But there really wasn't much doubt for a bounce, that is if you tracked indicatations from regional reports. A big highlight of the week is another strong Philly Fed where May's data include a 7th straight lengthening in delivery times. This is the longest streak for this reading since 1988. Slowing delivery times point to congestion in the supply chain and are a red signal that factory conditions are overheating, that production is beyond capacity. But can things really be this hot?

Maybe it's just the regional reports, especially the Philly Fed, that are overheating. These are voluntary reports with small samples and may, like consumer confidence readings, be picking up sentiment more than spending. But dollar totals, as tracked in factory orders, are indeed on the climb, up 5 percent from last year's low for capital goods (business equipment) to a monthly $63 billion and up 10 percent for all other durable goods to $176 billion.

Not on fire is manufacturing employment, stuck near 12.4 million all year despite Trump's call to keep jobs in America. Yet April's big gain in production, together with all the strength in all the regional reports, is pointing to the need for new hands and feet. Factory jobs, in sharp contrast to other areas of the labor market, have been chronically weak for a very long time, hitting a peak in 1979 at 19.6 million and moving down from there.

Contrasting with the big factory breakout is housing where data unexpectedly moved south in the week. Up-and-down with each report, how is housing actually doing? Construction payrolls are one way to judge and they have yet to recover from the wipe out of the recession which cost the sector 1/3 of its jobs. Still, payrolls have been climbing and are back near 7 million, a contrast however with construction supplies which have been lagging.

Housing starts data were the big dud of the week and another dud for the opening of the second quarter. Weakness is centered in multi-family units which used to be housing's strength. Multi-family permits moved higher in April but starts fell sharply and completions even more sharply. Multi-family permits, which take an average of 15 months before resulting in completions, peaked 2 years ago and have trended lower since.

Lack of new multi-family units may be leading ambitious buyers to single-family homes which is now the center of the strength. Yet April was not a good month for single-family data with both permits and completions way down. Single-family homes are still trending higher but have a very long way to go. Permits, at an annualized 789,000, are down 56 percent from 2005's bubble peak of 1.798 million. And completions, currently at 784,000, are down 95 percent.

But the near-term movement of data is what's most important for the economy. And home sales, despite lack of housing supply, have been up this year. Home builders continue to report ever higher rates of present sales and also 6-month sales. The special plus is traffic which is holding over 50 for the best run by far since the recession. This offers a hopeful hint that first-time buyers, which have been in short supply, may be a lucky wildcard for the sector.

Now the best news in the week and a reminder that second quarter data actually opened with strength, that is with the April employment report. Initial claims so far in May are pointing to a repeat of April, down 4,000 in the May 13 week to 232,000 and holding at 54 year lows. The May 13 week was the sample week for the May employment report and a comparison with the sample week of April, as seen in the graph, is pointing to strong labor demand.

Continuing claims are also making headlines, down 22,000 in lagging data for the May 6 week to a 29-year low of 1.898 million. The 4-week average, at 1.946 million, is a 43-year low. And the unemployment rate for insured workers is only 1.4 percent. When including job leavers and re-entrants, the rate moves to 4.4 percent which however is very low and meets the definition of full employment. Employers are not letting their people go.

Markets: Risks on the rise

The reflation trade is still holding but there are cracks. The sudden entrance of a special prosecutor raises political risk for the market, that is the possibility of uncertain outcomes for the administration. A secondary effect playing out is whether the economic agenda is being slowed down. Even if events prove only a side-show, they threaten to deflect the administration's energy, including Trump's personal efforts, to push through policy. The Dow slipped 0.4 percent in a bumpy week.

The bottom line

The new economic era has yet to replace the status quo. But the forward movement in manufacturing is a new feature, joining the economy's longheld strength which is employment. But for all the jobs everywhere, consumer spending is soft and is probably behind the uneven performance of the housing sector. What looked to be a slingshot second quarter is starting off on the mediocre side.

Week of May 22 to May 26

Monday opens up with the national activity index and a broad assessment of April, an important month that was expected to show great strength relative to a weak March. Housing starts proved an unexpected disappointment in April but the coming week has new home sales on Tuesday and existing home sales on Wednesday with respectable results expected for both. Later on Wednesday FOMC minutes will be posted with details on the Fed's tapering plans the focus. Advance trade data on Thursday will offer an important input into what looks to be a slower-than-expected second quarter. And the week ends with both the first revision to first-quarter GDP, where little change is expected, and also durable goods orders for April. Here expectations are wide with forecasters generally seeing a pullback for aircraft in what would be another disappointing signal for second-quarter GDP.

Monday

National Activity Index for April

Consensus Forecast: 0.10

Consensus Range: 0.01 to 0.25

Employment is likely to continue to boost what has otherwise been a soft national activity index that has been held back by manufacturing production and consumer spending. Forecasters see the index coming in only marginally in the plus column, at 0.10 in April which would only be slightly above March's disappointing plus 0.08.

Tuesday

New Home Sales for April

Consensus Forecast, Annualized Rate: 604,000

Consensus Range:  585,000 to 622,000

New home sales are one of the biggest strengths so far this year, closing out a very strong first quarter with a 621,000 rate in March that, next only to 622,000 in July last year, is by far the strongest of the expansion. Prices have been firming as supply remains low. Forecasters see March's rate for new home sales easing to 604,000.

Richmond Fed Manufacturing Index for May

Consensus Forecast: 15

Consensus Range: 13 to 18

The Richmond Fed's manufacturing index wasn't the first regional report to begin moving higher but its strength, like that of the Philly Fed, is enormous, at 22 in March and 20 in April for the first back-to-back 20 showing since 1994. Orders and shipments have been showing unusual strength. Econoday's consensus for the April index is 15.0.

Wednesday

FHFA House Price Index for March

Consensus Forecast, Month-to-Month Change: 0.5%

Consensus Range: 0.3% to 0.6%

The FHFA house price index has been posting very strong rates of growth consistent with strong demand in the housing sector. The index rose 0.8 percent in the February report for year-on-year appreciation for 6.4 percent. The Mountain is the leading region at nearly 10 percent with the Mid-Atlantic in the rear at 5 percent. The March consensus is a monthly 0.5 percent.

PMI Composite for May, Flash

Consensus Forecast: 53.2

Consensus Range: 52.5 to 53.5

PMI Manufacturing for April, Flash

Consensus Forecast: 53.1

Consensus Range: 52.6 to 54.0

PMI Services for April, Flash

Consensus Forecast: 53.1

Consensus Range: 52.1 to 53.5

The PMI composite held steady in April at a moderate 53.2 which is above either of the two components: 52.8 for manufacturing and 53.1 for services. This anomaly aside, the story of these reports is that, in comparison to nearly all other advance surveys, they are running at noticeably more moderate rates of growth and more correctly in line with government data. For the May flash the consensus is: 53.2 for the composite and 53.1 for both manufacturing and services.

Existing Home Sales for April

Consensus Forecast, Annualized Rate: 5.650 million

Consensus Range: 5.530 to 5.800 million

Resales flattened out late last year at the 5.550 million level but have been moving higher in recent reports, to a 5.710 million annualized rate in March and a 10-year high. Prices are rising and days on the market are falling, both consistent with a market that is heating up. April's consensus for existing home sales is 5.650 million.

FOMC Minutes

Covering the May 2 & 3 Meeting

The May FOMC produced no action and no commentary on tapering plans. Policy makers confirmed their confidence in consumer spending which had weakened going into the May meeting and also restated their expectations that inflation data, which also weakened going into the meeting, would firm and eventually stabilize at their 2 percent target. But it will be new details on tapering that will be of special interest, including when the unwinding will begin and how long it will take.

Thursday

International Trade In Goods for April

Consensus Forecast, Month-to-Month Change: -$64.7 billion

Consensus Range: -$65.5 to -$62.0 billion

The goods deficit in March widened slightly on export declines for industrial supplies and consumer goods and an import jump for cars. The consensus for the April gap is $64.7 billion vs $65.5 billion in March (revised from $64.8 billion in the advance release). April goods data will offer an early input for second-quarter GDP.

Initial Jobless Claims for May 20 week

Consensus Forecast: 237,000

Consensus Range: 235,000 to 240,000

Jobless claims have been very low and pointing to unusually strong demand for labor. Forecasters see initial claims coming in at 237,000 in the May 20 week vs 232,000 in the prior week.

Kansas City Manufacturing Index for May

Consensus Forecast: 7

Consensus Range: 4 to 10

The Kansas City's manufacturing index slowed to 7 in April, still solid but down from prior readings especially an unusually strong March score of 20. Yet both new orders and backlogs orders have both been showing significant strength that points to solid activity. The Econoday consensus for May is for a second straight 7.

Friday

Durable Goods Orders for April

Consensus Forecast, Month-to-Month Change: -0.9%

Consensus Range: -2.3% to 2.0%

Durable Goods Orders, Ex-Transportation

Consensus Forecast: 0.4%

Consensus Range: 0.1% to 0.8%

Aircraft orders lifted durables throughout the first quarter and were the backbone for March's solid 0.7 percent rise. But the story is different when excluding civilian aircraft as the ex-transportation reading fell 0.2 percent. Forecasters see the aircraft factor playing out in April, with the consensus for overall durable orders at minus 0.9 percent but ex-transportation at plus 0.4 percent.

Real GDP: 1st Quarter, 2nd Estimate, Annualized Rate

Consensus Forecast: 0.8%

Consensus Range: 0.7% to 1.0%

Real Consumer Spending, Annualized Rate

Consensus Forecast: 0.4%

Consensus Range: 0.3% to 0.5%

GDP Price Index

Consensus Forecast: 2.3%

Consensus Range: 2.3% to 2.4%

Second-quarter GDP is expected to be revised to 0.8 percent from an initial estimate of 0.7 percent. Consumer spending was very weak in the first estimate, at a 0.3 percent annualized rate of growth with the revision seen at plus 0.4 percent. Forecasters see the GDP price index holding unchanged from its initial 2.3 percent.

Consumer Sentiment Index, final May

Consensus Forecast: 97.6

Consensus Range: 95.0 to 99.0

The consumer sentiment index has been holding at strong levels reflecting a steady assessment of current conditions and solid confidence in the outlook. Econoday's consensus for final May is 97.6 vs a preliminary reading of 97.7 and April's 97.0.