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US Retail Sales Rose, But Building Permits Fall; Fed Rate Cut Decision Pending

US retail sales rose to 0.7% last month after a similar increase in May of 0.6%. With retail sales numbers such as the ones mentioned, it is very difficult for traders and investors to hold on to the belief that the Federal Reserve will still cut interest rates by 25bps at the July 31st meeting.

A few days later, more economic data confirmed the actual state of the economy. This new economic data came from the building permits report. The building permit report is a key economic report with data that provides information to the government as to the health of the economy. A building permit is an authorization granted by a government or local regulatory authority before the construction of a new building or existing building can occur legally. This is to ensure that the proper building codes are followed when a building is constructed or repaired. The United States Census Bureau Reports the finalized number of building permits on hand for the month on the 18th working day of each month.

So, what was the result of the most recent building permit? Not good. At 8:30 am, on July 17, 2019, the building permit numbers came out much lower than expected. The previous number was 1.299M a month ago. The forecasted number was 1.300M, and the actual number came in at 1.220M. So, what is this telling us. As soon as the economy takes one step forward, in a couple of days, it takes one step backward. We can see here that the forecast-miss of the building permit is steeper than the forecast gain of the retail sales number. The steeper slope wins every time and the building permit number definitely has a steeper slope than the retail sales number.

The monthly building permit report is watched closely by traders, investors, economists, and by the Federal Reserve.  Because all related factors associated with the construction of a building are very important economic activities (for example, financing and employment), the building permit report can give major hints as to the current state of the economy in the not-so-distant future. So, the fact that the latest building permit numbers came in well below estimates, there is cause for concern and the Feds may very will cut interest rate to jump start the economy by putting a cap on the progress of deflation.

Therefore, despite consumers energized appetite to spend a little money on retail, they are not willing to spend large sums of money on large projects, such as the construction of homes, buildings, etc. This is a tell, tell sign that the economy is indeed heading down the wrong path. So, I am predicting with some level of confidence that the Feds will cut interest rates by 25bps at the July 31st meeting. How could they not?

A very important point that needs to be considered is that the Fed is reluctant to acknowledge subtle changes in the economy. An example of a subtle change is a retail sales number improving from 0.6% to 0.7%. According to Fed Chair Mr. Jerome Powell, significant and continuous changes in the economy is what will force the hands of the Feds to cut interest rates. The Fed Chair gave the impression that a small boost characterized by an interest rate cut of 25bps is all that is currently needed to stimulate the economy. A larger interest rate cut would be irresponsible.   

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