Monthly Economic Review: The U.S.

Many forex traders lost faith in a highly anticipated (and probably over-hyped) September rate hike due to the recent global market meltdown. Federal Reserve Bank of New York President William Dudley then delivered the coup de grâce when he said in no uncertain terms during a recent speech that a September rate hike is “less compelling.”

But all was not lost because he also said that a rate hike could “become more compelling by the time of the meeting as we get additional information on how the U.S. economy is performing and more information on international and financial market developments.” So, how is the U.S. economy doing lately?

Growth

The second estimate for Q2 U.S. GDP saw a large revision from 2.3% to 3.7%, which also happens to be a massive improvement over Q1 2015’s final reading of 0.6%. As I wrote in a more in-depth article, the upward revision was due to stronger than expected readings for non-residential fixed investments and private inventory investments, whereas both components posted a decrease during the first estimate.

Forex - U.S. GDP

Employment

According to the U.S. Bureau of Labor Statistics, the jobless rate was unchanged at 5.3% for the month of July, and the same can be said for the labor force particiaption rate, which remained steady at 62.6% after sliding by 0.3% back in June. The number of unemployed people also remained stready at 8.3 million. Wages also finally saw some growth, increasing by 0.2% in July after remaining flat back in June.

Forex - U.S. Jobless Rate

So far, so good, right? Well, now comes the not-too-happy news since non-farm payrolls in July only saw a 215K increase but the figure for June got revised higher from 223K to 231K. Even worse news is that both the current and previous readings fall below the 12-month average of 246K. On a more upbeat note, July marked the 58th consecutive month of jobs gains, with most sectors seeing a net increase in jobs.

Consumer Sentiment &  Spending

The final reading for the University of Michigan’s (UOM) consumer sentiment survey was revised lower to 91.9 from 92.9, which is a disappointment when compared to July’s 93.1. The other survey results also saw a broad decline: the final reading for current economic conditions was downgraded from 107.1 to 105.1, which is a tad lower than July’s 107.2, while consumer expectations was likewise downgraded from 83.3 to 83.4, which is worse than July’s 84.1.

Forex - U.S. Consumer Sentiment

Commentary from the UOM pointed to the so-called “Black Monday” of August 24, which is when the Dow Jones Industrial Average dropped for about 1,000 points at the open due to concerns over China’s economy, as the main cause for the broad decrease in consumer confidence.

Moving on, the advanced reading for retail sales in July advanced by 0.6% month-on-month and 2.4% year-on-year, which is very welcome news after last month’s stagnation. Core retail sales also saw a nice 0.4%, a significant improvement over last month’s 0.1% contraction.

Forex - U.S. Retail Sales

Business Conditions

The Federal Reserve’s industrial production report for July showed a 0.6% month-on-month increase (+0.1% previous), with manufacturing output rising by 0.8% after decreasing by 0.3% in the previous month. The increase in manufacturing output was apparently due to a 1.2% increase in durable goods, thanks to higher demand for motor vehicles and parts.

Speaking of the manufacturing sector, the Institute of Supply Management’s (ISM) PMI reading for July is indicating that the expansion is slowing down since the current reading went down to 52.7 from 53.5. This is at odds with Markit’s manufacturing PMI for July since Markit’s reading ticked higher from 53.6 to 53.8, but the preliminary reading for August is more in line with ISM’s reading since it saw a significant drop to 52.9, which is the lowest level since October 2013. It’s still above the 50.0 neutral mark, though.

Forex - U.S. Manufacturing PMI

According to Markit, the slowdown was due to a one-two punch from subdued export sales and a slowdown in job creation, which could mean that the upcoming jobs data for August could potentially see some deterioration.

Inflation

The headline reading for the seasonally-adjusted consumer price index was a disappointment to many forex traders since it only advanced by 0.1% month-on-month (+0.2% expected, +0.3% previous). The core reading was also a disappointment to forex traders because it also only increased by 0.1% (+0.2% expected, +0.2% previous). On a yearly basis, the headline reading looked a little bit better since it increased by 0.2% (+0.1% previous).

Month-on-month, the greatest drag was the 3.4% decline in fuel oil prices, and the same holds true on a yearly basis since the same sub-component posted a whopping -29.7% year-on-year decline.

Forex - U.S. CPI

Summary & Potential Effects on the Forex Market

Overall, the U.S. economy is still pretty darn solid, so longer-term, fundamentals-based forex traders may keep the Greenback supported. True, consumer sentiment slumped a bit, but the overall decline in consumer sentiment was not due to concerns over the U.S. economy.

The only worrying data point is CPI since it’s still a far cry from the Fed’s 2.0% target and lower oil prices may persist as a deflationary risk. The PMI reading for August also has hints of a possible slowdown and worsening employment levels, but these are not set in stone yet and the government’s data has deviated often enough from the anecdotal evidence gathered during PMI surveys.

In the shorter-term, perhaps  the U.S. economy’s solid performance may convince some forex traders to have faith in a rate hike sometime this year, although risk sentiment and the forex market’s inter-market relationships would likely continue to weigh-in on the Greenback.