Greetings, forex friends! Since the another FOMC statement is coming up this week, I thought that now would be a good time to give y’all an overview on how the U.S. economy is doing recently.
- The preliminary or second reading for U.S. Q2 2017 GDP growth was revised higher from 2.6% quarter-on-quarter annualized (0.64% unannualized) to 3.0% (0.75% unannualized).
- This is the strongest quarterly rate of expansion in 9 quarters.
- In addition, this is a solid improvement compared to Q1 2017’s downwardly revised 1.2% rate of expansion (+1.4% originally), which was the weakest since Q1 2016.
- The rebound also breaks two quarter of slowing quarterly growth.
- The stronger quarter-on-quarter reading was driven mainly by stronger consumer spending (+3.3% vs. +1.9% previous), which added 2.28% to GDP growth.
- Meanwhile, the 3.6% surge in private investment (-1.2% previous) was also a growth driver, adding 0.60% to GDP growth in Q2 after subtracting 0.20% from Q1.
- Net trade was also a driver, but its contribution was slightly smaller in Q2, adding only 0.21% to Q2 quarterly growth after adding 0.22% previously.
- Thew weaker positive contribution from trade was mainly due to weaker exports (+3.7% vs. +7.3% previous).
- Year-on-year Q2 GDP was revised slightly higher from 2.1% to 2.2%.
- This is still the fastest rate of annual expansion as in seven quarters.
- This also marks the fourth consecutive quarter of faster annual growth.
- Furthermore, GDP growth is currently hitting the Fed’s forecast of 2.2% growth in 2017.
- Looking at the details, consumer spending was actually weaker on a year-on-year basis (+2.7% vs. +2.9% previous).
- However, the weakness in consumer spending was more than offset mainly by stronger private investment grew (+3.3% vs. +1.7% previous).
- The 3.3% year-on-year increase in private investment is the strongest in seven quarters.
- Non-farm payrolls in the U.S. increased by 156K in August, which is less than the 180K increase.
- Worse, the reading for July was downgraded from +209K to +189K.
- Likewise, the reading for June was revised lower from +231K to +210K.
- This means that the U.S. economy generated 41K less jobs than originally estimated and the reading for August missed expectations to boot.
- The jobless rate, meanwhile, ticked higher from 4.3% to 4.4%.
- The jobless rate worsened even though the labor force participation rate held steady at 62.9%.
- That means that the jobless rate worsened because the number of unemployed Americans rose from 6,981K to 7,132K.
- As for wage growth, average hourly earnings increased by 0.11% month-on-month in August.
- This is weaker than the +0.2% consensus and slower than last month’s +0.34%.
- Moreover, the 0.11% increase is the weakest monthly rise in five months.
- It also puts an end to two straight months of better readings.
- Year-on-year, average hourly earnings rose by 2.53% in August, matching the annual increase in July.
- The PCE price index (y/y) is the Fed’s preferred measure for inflation.
- Having said that, the headline PCE price index rose by 0.09% month-on-month in July.
- This is faster than the +0.04% printed in June and marks the second straight month of increases as well.
- The core reading, meanwhile, printed a weaker 0.09% increase after rising by 0.13% in June.
- Year-on-year, the headline PCE price index rose by 1.40% in July.
- This is the slowest annual reading in ten months and marks the fifth consecutive month of ever poorer annual readings.
- Moreover, the headline reading is veering away from the Fed’s 2017 forecast of +1.6%.
- Not only that, the core PCE price index came in at +1.41%, which is weaker than the +1.51% back in June.
- Worse, the July reading is the weakest in 19 months.
- It’s also a long way away from the Fed’s forecast of 1.7% for this year.
- Looking forward, CPI rose by 0.40% month-on-month in August.
- This is faster the the previous month’s +0.11% increase and is the strongest month-on-month increase in seven months.
- The faster increase was driven primarily by the 2.8% jump in energy prices (-0.1% previous).
- And the jump in energy prices, in turn, was driven mainly by the 6.3% surge in gasoline prices (+0.0% previous).
- Energy prices are stripped the core reading, but the increases printed by other components, namely the higher costs for non-energy services (0.4% vs. 0.2% previous) allowed the core reading to print a stronger 0.2% rise (+0.1% previous).
- Year-on-year, however, CPI rose by 1.94% (+1.73% previous).
- This marks the second month of stronger headline readings after four straight months of deteriorating annual readings for headline CPI.
- It also happens to be the strongest annual headline reading in four months.
- The annual reading for core CPI, meanwhile, printed a slower 1.68% rise (1.69% previous).
- The weakness is only marginal, but it still marks the seventh consecutive month of weaker annual core readings.
Business Conditions & Sentiment
- Markit’s manufacturing PMI reading eased from a four-month high of 53.3 to 52.8 in August.
- According to Markit, the headline reaing weakened because “production levels increased at the weakest rate since June 2016.”
- In addition, “Exports drag on order book growth.”
- ISM’s manufacturing PMI report contradicts Markit’s finding since the headline reading for ISM’s manufacturing PMI jumped from 56.3 to 58.8.
- That’s a 34-month high, by the way.
- The jump was due mainly to stronger readings for the production, employment, and inventories sub-indices.
- The higher production sub-index, in particular, contradicted Markit’s finding that production weakened.
- However, both Markit and ISM agree that exports weakened in August.
- Looking at the “hard” data, total industrial output in the U.S. fell by 0.9% month-on-month in August (+0.4% previous).
- All major components (mining, utilities, manufacturing) took hits.
- Looking at the 0.3% decline in manufacturing production, in particular, it looks like Markit was right on this one while ISM was wrong.
- Moving on, Markit’s services PMI reading improved further from 56.9 to a 21-month high of 56.0 in August.
- According to Markit, “August data signalled an accelerated upturn in business activity across the US service sector. New orders also expanded at a quicker rate, with growth reaching a 25-month high. Higher activity and new business prompted firms to add to their payrolls again in August, and at the quickest rate for nearly two years.”
- ISM agrees with Markit on this one since ISM’s non-manufacturing PMI reading rose from 53.9 to 55.3 in August.
- ISM also agrees that business activity, new orders, and employment picked up.
- Personal income from all sources rose by 0.4% month-on-month in July after stalling previously.
- This is a solid rebound and is the strongest reading in five months.
- In real terms (inflation is taken into account), personal income rose 0.3% month-on-month.
- The rise in real income translated to higher spending, with total consumer spending increasing by 0.3% in July.
- Higher consumer spending also gave retail sales a boost in July.
- Looking forward, however, the total value of retail sales fell by 0.2% month-on-month in August.
- The weakness wasn’t really that broad-based since only 5 out of the 13 retail store types reported declines in sales, with the rest reporting higher sales.
- However, the 1.6% drop in sales reported by vehicles and parts dealers, as well as the 1.0% drop in sales reported by clothing stores, were just too much to overcome.
- Sales from vehicles and parts dealers are excluded from the core reading but sales from clothing store are not.
- And that’s why the core retail sales reading also printed a weaker 0.2% increase (+0.4% previous).
- On a more upbeat note, the total value of retail sales during the available Q3 months is still likely to be bigger compared to Q2.
- In fact, if September headline retail sales fell by 0.36% month-on-month, then retail sales in Q3 would still be equal to Q2.
- Of course, in that case, retail sales won’t have a positive contribution to GDP growth.
- Year-on-year the total value of retail sales increased by 3.2%, slowing from the previous month’s +3.5% reading.
- The U.S. trade deficit widened from $43.543 billion to $43.689 billion in July.
- The trade gap widened because exports fell by 0.29% after printing a solid 1.37% increase previously.
- This is the the first fall in exports after two months of increases and is a bad start for Q3 GDP growth.
- On a somewhat upbeat note, the weakness in exports was partially offset by the bigger decrease in imports (-0.18% vs. -0.09% previous).
- Year-on-year, exports only increase by 4.88%.
- This is the slowest annual increase in seven months.
- Imports, meanwhile, increased by 5.05%.
- Given those two readings, it looks like net trade is on course to being a drag on the year-on-year reading for Q3 GDP growth.
Putting it all together
U.S. GDP growth in Q2 was quite impressive since it printed the fastest quarter-on-quarter growth in 9 quarters and the fastest year-on-year growth in 7 quarters. In fact, the year-on-year reading of 2.2% is already hitting the Fed’s forecast for 2017.
However, it remains to be seen if GDP growth will be able to maintain its pace. And looking at the available economic reports for Q3, it doesn’t look too good since exports weakened in July and the PMI reports are pointing to further weakness in August.
Consumer spending, meanwhile, is still somewhat robust despite the poor reading for August retail sales. Although further weakness in retail sales will likely signal a smaller positive contribution from consumer spending to GDP growth, which obviously means weaker overall GDP growth. After all, consumer spending is the backbone of the U.S. economy.
Also, the most recent data doesn’t yet reflect the damage inflicted by Hurricane Harvey and Hurricane Irma.
And those two hurricanes and early signs of weakness may force the Fed to downgrade their growth projections, at least for 2017.
As for inflation, the Fed has a problem with that since the headline year-on-year reading for the PCE price index printed the slowest in 10 months in July while the core reading printed the weakest in 19 months.
And looking at August CPI, headline CPI printed a stronger reading year-on-year, which will likely pull up the headline PCE price index. However, the core reading continues to edge marginally lower, which does not bode well for core PCE price index.
It therefore wouldn’t be too surprising if the Fed decides to further downgrade its inflation forecasts or at least sound less upbeat about them.