Economic Snapshot: The United States

Hello, forex friends! I already gave y’all a roundup on the most recent Fed speeches and interviews to help you put the upcoming FOMC statement into perspective. But why stop there, right? That’s why I also thought that now would be an ideal time to give y’all an economic roundup as well.

Note: As with all Economic Snapshots, there are nifty tables and a summary at the bottom, so you can skip to those if you’re a forex trader who’s in a hurry. However, the bullet points provided highlight the underlying details and trends that give the numbers their proper context.

Growth

  • The second annualized quarter-on-quarter estimate for Q2 2016 GDP growth was downgraded from +1.2% to +1.1%.
  • This is faster than Q1’s downwardly revised +0.8% pace of expansion (+1.1% originally).
  • Also, the Q2 reading ends three straight quarters of ever weakening quarterly growth.
  • Keep in mind, however, that Q2 GDP was originally expected to grow by 2.6% quarter-on-quarter annualized.
  • The current reading is therefore a very substantial miss.
  • Year-on-year, Q2 GDP grew by 1.2%, which is slower than Q1’s 1.6% rate of increase.
  • This is the weakest annual growth rate since Q2 2013.
  • In addition, this marks the fifth consecutive quarter of slowing annual GDP growth after peaking at +3.3% back in Q1 2015.
  • Consumer spending, otherwise known as personal consumption expenditure, is still the backbone of the U.S. economy.
  • It grew by 4.4% (+1.6% previous), adding 2.94% to annualized quarter-on-quarter GDP growth (+1.11% previous).
  • Trade was also a minor growth driver, adding 0.10% to annualized quarter-on-quarter growth, thanks mainly to the 1.2% increase in exports.
  • The biggest drag in Q2 was the business inventories component, which subtracted 1.26% from total GDP growth.
  • The large drop in business inventories could be a bad thing or a good thing.
  • If you’re an optimist, then the drop may mean stronger demand, as well as a potential bounce in Q3 as depleted inventories are restocked.
  • But if you’re a pessimist, then the drop may signal actual weakness due to the persistent slump in business fixed investment.
  • Speaking of business investment, it also contracted in Q2, albeit at a weaker pace (-0.9% vs. -3.4% previous), subtracting 0.11% from GDP growth in the process.
  • Business fixed investment has been contracting for three straight quarters as of Q2 2016.
  • Residential fixed investment also dropped hard for the first time since Q1 2014, subtracting 0.30% from total GDP growth.
  • As for government spending and investment, it was also a drag, subtracting 0.27% from GDP growth, since State and local government investment declined by 2.2% (+3.5% previous).

Employment

  • Non-farm employment only increased by 151K in August, missing expectations that the U.S. will generate 180K jobs.
  • But on a more upbeat note, the reading for July was upgraded from 255K to 275K.
  • However, the reading for June was downgraded from 292K to 271K, so there was actually a loss of 1K jobs from all those revisions, which is bad.
  • The service sector continued to provide most of the jobs, generating 148.7 jobs in August.
  • This is fewer than the 275.0K jobs generated in July, though, which is one of the major reasons why jobs growth slowed.
  • However, a large chunk of the jobs generated came from lower-paying service sector industries, such as retail trade, warehousing and storage, social assistance, and accommodation and food services.
  • In addition, manufacturing shed jobs in August, with most of the job losses coming from the higher-paying durable goods manufacturing sector.
  • The two above points are the likely reasons why average hourly earning only grew by 0.1% month-on-month (+0.3% previous).
  • As for the jobless rate, it held steady at 4.9% while the labor force participation rate also held steady at 62.8%.
  • The jobless rate has been holding steady at 4.9% for three months running as of August, even though June and July printed relatively large increases in non-farm employment.

Inflation

  • Headline month-on-month CPI advanced by 0.2% in August after flattening out in July, which is great.
  • Meanwhile, the headline year-on-year reading, increased by 1.1%, which is a four-month high and definitely better than the previous month’s +0.8%, a seven-month low.
  • As for the core reading, it increased by 2.3% year-on-year (2.2% previous).
  • The main driver for the month-on-month increase was the 0.3% increase in the cost of shelter (+0.2% previous).
  • The uptick may be small, but shelter accounts for around 33% of CPI.
  • Non-energy and non-food commodity prices, which account for 19% of CPI, were also a driver since they increased by 0.1% (-0.1% previous).
  • Meanwhile, food and energy costs were flat.

Business Conditions & Sentiment

  • ISM’s manufacturing PMI reading for August plunged from 52.6 to a six-year low of 49.4
  • It was a pretty broad-based too, since all sub-indices got hit.
  • However, the very large drop in new orders (49.1 vs. 56.9 previous), together with the large drop in business production (49.4 vs. 52.6 previous), appear to be the main culprits.
  • ISM’s non-manufacturing PMI also slumped hard, from 55.5 to 51.4, which is the weakest reading since March 2014.
  • It’s still above the 50.0 stagnation level at least.
  • Like that of ISM’s manufacturing PMI, the deterioration in the non-manufacturing sector was pretty broad-based as well.
  • The large drop in the headline reading was also due to lower readings for the new orders (51.4 vs. 60.3 previous) and business activity (51.8 vs. 59.3 previous) sub-indices.
  • As for Markit’s manufacturing PMI reading for August, it slid down from an eight-month high of 52.9 to 52.0.
  • It’s still above the 50.0 stagnation level, though, so it’s not as bad as ISM’s manufacturing PMI reading.
  • Markit’s services PMI also took a tumble, creeping lower from 51.4 to 51.0, which is a six-month low.
  • According to commentary from Chris Williamson, Markit’s Chief Economist, “the manufacturing and services PMIs are pointing to an annualised GDP growth rate of a mere 1%.”
  • But on a more optimistic note, the weaker PMI readings were “often linked by companies to growing uncertainty about the economic outlook as the presidential election approaches, suggesting growth could pick up again later in the year.”
  • With regard to hard government data, total industrial production fell by 0.4% month-on-month and 1.1% year-on-year in August.
  • The poor PMI readings were therefore confirmed by the government’s own production numbers.

Consumer Spending

  • Personal income from all sources increased by 0.4% in July, which is bigger than the 0.3% increase in June.
  • It looks even better when inflation is taken into consideration, since real personal income increased by 0.5% (0.3% previous).
  • Despite the faster increase in real income, Americans seem hesistant to splurge, since personal spending only increased by 0.3% in July, which is slower than the 0.5% increase in June.
  • The retail sales readings for July deteriorated across the board, probably because of this lack of propensity to spend.
  • Most of the retail sales readings for August are even worse, since headline retail sales contracted by 0.3% month-on-month (0.1% previous).
  • This is the first contraction in five months and also marks the second straight month of deteriorating monthly readings.
  • On an annual basis, headline retail sales grew by 1.9%, which is the poorest reading in five months.
  • It also marks the second straight month of weaker annual increases.
  • Looking at the details of the report, the contraction in the headline monthly reading was due to the 0.9% drop in vehicle sales.
  • However, 8 of the remaining 13 retail store types also reported decreases in sales, which is why the core reading also took a hit, albeit smaller compared to last time.
  • Overall, the retail sales readings for the the available Q3 months don’t look very promising.

Trade

  • The U.S. trade deficit narrowed from $44.66 billion to $39.47 billion in July.
  • The narrower deficit was thanks to exports increasing by 1.86% to a 10-month high of $186.33 billion.
  • It also slightly helped that imports contracting by 0.78% from a nine-month high of $227.58 billion to $225.81 billion.

U.S. Economy: Growth

U.S. Economy: Employment

U.S. Economy: Inflation

U.S. Economy: Business Sentiment & Conditions

U.S. Economy: Consumer Spending

U.S. Economy: Trade

Putting it all together

The second estimate for Q2 U.S. GDP growth came in at 1.1% quarter-on-quarter annualized, which is better than Q1’s downwardly revised 0.8% rate of expansion. Do note, however, that Q2 GDP was originally expected to grow by 2.6%, so the highly anticipated rebound in GDP growth hasn’t materialized yet as of H1 2016. Having said that, the annual reading continued to trend lower, with the current reading of 1.2% being the weakest since Q2 2013. This cannot be explained away by seasonal adjustments, and is something that’s being pointed out by the more cautious (or outright dovish) Fed officials.

Looking forward, the available data for Q3 doesn’t look very promising overall. The retail sales readings for July and August, for instance, were pretty disappointing. This obviously does not bode well for Q3 GDP growth, given that consumer spending is the backbone of the U.S. economy.

The PMI readings also deteriorated and the government’s own production numbers verify the poor PMI readings. This, too, would be a drag on Q3 GDP. And if you didn’t skip the bullet points above, then you already know that the large drop in inventories was the main reason for the weak Q2 GDP growth. Well, if you consider the weak production numbers, then it appears as if the pessimistic scenario appears to be the case, which is that there is an underlying weakness in the U.S. economy.

On the brighter side of things, the trade deficit in July narrowed due to the jump in exports, so trade will likely be a positive contributor, as long as the trade numbers don’t deteriorate in August and September of course. Jobs growth also remains robust and well above the 100K needed to keep up with working-age population growth. Wage growth is pretty weak, though, probably because a large chunk of the job gains come from lower-paying industries. Finally, headline inflation remains subdued, but it did recover in August after deteriorating in July, and that’s a good thing as well.