Greetings, forex friends! Another FOMC meeting is coming our way and expectations are high that the Fed will hike rates. And if that made you wonder how the U.S. economy is doing lately, then today’s Economic Snapshot is just for you.
- The second estimate for U.S. Q1 2017 GDP growth came in at 1.2% quarter-on-quarter annualized (0.29% q/q not annualized)
- This is an upgraded reading from the original estimate of +0.7%, which was the weakest reading in over three years.
- Despite the upgrade, quarterly growth in Q1 is still the slowest in four quarters.
- The major reason for the slowdown in quarterly GDP growth was the much slower growth in consumer spending (+0.6% vs. +3.5% previous).
- The slower growth in gross private investment was also a major reason for slowdown (+4.8% vs. +9.4% previous).
- However, it should be pointed out that the poor growth in gross private investment came mainly from the 1.07% slump in inventories (+1.01% previous).
- Fixed investment, meanwhile, actually increased by 1.85% (+0.46% previous), with residential investment rising by 0.50% (0.35% previous) and business investment up by 1.34% (+0.11% previous).
- Net trade was able to partially offset the weakness from the above two GDP component, though, thanks to exports rising by 5.8% (-4.5% previous) while imports only rose by 3.8% (+9.0% previous).
- Year-on-year GDP grew by 2.0% in Q1 2017, which is the same rate of expansion as in Q4 2016.
- Growth in consume spending slowed year-on-year (+2.8% vs. +3.1% previous).
- Fortunately, this was offset mainly by the 2.1% increase in gross private investment (+0.1% previous).
- Non-farm employment increased by 138K in May, missing expectations that non-farm jobs would increase by 180K to 186K.
- Worse, the reading for April was downgraded from 211K to 174K.
- Moreover, the reading for March was also downgraded from 79K to 66K.
- That’s a net loss of 66K jobs from all those revisions.
- The jobless rate, meanwhile, fell from 4.4% to 4.3%.
- This is the lowest reading since May 2001, which is great.
- Also, this marks the fourth consecutive month of ever lower readings for the jobless rate.
- However, the lower jobless rate was partially due to the labor force participation rate dropping from 62.9% to 62.7%.
- This is the poorest reading in five months and marks the second month of falling participation rate.
- As for wage growth, average hourly earnings increased by 0.15% month-on-month in May.
- This is slower than the 0.19% increase recorded in April.
On a year-on-year basis, average hourly earnings increased by 2.46%.
- This is slower than April’s +2.51% and is the slowest increase in 14 months to boot.
- Also, this marks the third month of slower wage growth, at least on a year-on-year basis.
- The core PCE price index (y/y) is the Fed’s preferred measure for inflation.
- Having said that, the headline PCE price index increased by 0.19% month-on-month in April, which is a relied after the 0.22% decline previously.
The core reading also recovered with a 0.15% month-on-month increase (-0.13% previous).
- This is slightly better than the consensus for a 0.1% increase.
- Year-on-year, headline PCE price index rose by 1.71% in April, which is slower than the 1.85% printed in March.
- This is the weakest annual reading in four months.
- As for the core PCE price index, it increased by 1.54%, which is slightly slower than the 1.59% increase in March.
- In addition, this is the weakest increase in 16 months.
- Furthermore, this marks the second consecutive month of poorer annual readings, which means that core PCE is drifting away from the Fed’s 2.0% target.
- Moreover, the year-on-year increase was driven mainly by services while durable goods were actually deflationary.
- Still, April’s reading did slightly beat the consensus that the core PCE price index would print a 1.50% year-on-year increase.
Business Conditions & Sentiment
- Total industrial output in the U.S. expanded by 1.0% month-on-month and 2.2% year-on-year in April, accelerating from their respective readings.
- These mark the third consecutive month of increases in both monthly and annual industrial output.
- Also, these marks the second month of faster increases, which is great.
- The rapid increase in mining and manufacturing output are the main drivers for the faster monthly and annual increases in industrial output.
- Looking forward, Markit’s manufactuing PMI reading eased from 52.8 to 52.7 in May.
- This is the lowest reading in 8 months.
- Also, this marks the fourth consecutive month of deteriorating readings.
- According to Markit, the weaker reading “reflected a moderation in new business growth to its weakest for eight months, alongside relatively subdued increases in output and employment.”
- Fortunately, Markit’s services PMI reading continues to improve, rising from 53.1 to 53.6 in May.
- This is a three-month high and marks the second consecutive month of ever better readings.
- And Markit happily attributed the better reading to new businesses growing “at the fastest rate since January.”
- Moving on, ISM disagrees with Markit since ISM’s manufacturing PMI reading improved further from 54.8 to 54.9.
- Moreover, ISM’s new orders sub-index rose from 57.5 to 59.5, which also contradicts Markit’s observations.
- As for ISM’s non-manufacturing PMI, it also contradicts Markit’s services PMI reading since it fell from 57.5 to 56.9 in May.
- ISM’s new orders sub-index also fell from 63.2 to 57.7, which disagrees with Markit’s claim that new business growth accelerated.
- Personal income from all sources increased by 0.5% month-on-month in April (+0.2% previous).
- Taking inflation is into account, real personal income grew by 0.2% month-on-month, which is slower than the 0.4% increase in March.
- Despite the slower increase in real personal income, total spending on goods and services increased by 0.4% month-on-month.
- This is slightly higher than the 0.3% increase that was reported in March.
- Spending on services was actually lower (+0.3% vs. +0.6% previous) but higher spending on goods more than made up for it.
- Looking specifically at retail trade, the total value of retail sales increased by 0.4% month-on-month in April.
- This is a bigger monthly increase when compared to the 0.1% increase in March.
- The core reading, meanwhile, grew by 0.3% month-on-month, matching the increase in March.
- Year-on-year, however, headline retail sales grew by 4.5%, which is much slower than the 5.2% increase reported in March.
- Also, this is the weakest annual rate of increase in four months.
- Looking at the details of the report, 9 of the 13 retail store types reported month-on-month increases in retail sales.
- However, the main driver for the faster month-on-month increase was higher vehicle sales.
- Vehicle sales are stripped from the core reading, which is why the core reading didn’t pick up the pace.
- The U.S. trade deficit widened from $45.28 billion to $47.61 billion in April.
- This is obviously a poor start for Q1 trade.
- The wider deficit was thanks exports sliding by 0.25% to $190.95 billion while imports rose by 0.78% to $238.59 billion.
- This marks the second month of falling exports.
- And the slide in exports was due to export of goods falling by 0.42%, thanks to exports of consumer goods dropping to their lowest level in almost a year.
- The increase in imports, meanwhile, was drive primarily bu higher imports of consumer goods, which is in-line with the higher retail sales in April.
Putting it all together
The Fed forecasted during the March FOMC meeting that GDP will grow by 2.1% year-on-year by the time Q4 rolls around.
And despite the poor quarter-on-quarter reading for Q1 GDp growth, the year-on-year reading is still actually on track at +2.0%.
Moroever, the poor first estimate for Q1 GDP growth did get upgraded from +0.7% quarter-on-quarter annualized to +1.2%. And that will likely ease the concerns of some Fed officials who were a bit worried about the poor quarterly growth, as revealed in the May FOMC meeting minutes.
Also, the Fed did say during the May FOMC statement that it “views the slowing in growth during the first quarter as likely to be transitory and continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace.”
And looking at the available GDP components, it looks the Fed may be right since Q2 is off to a good start, at least on a quarter-on-quarter basis. After all, retail sales rebounded and industrial production surged. The only disappointment was the wider trade deficit in April, thanks to the second month of falling exports.
Moving on to inflation, the Fed expects both the headline and core readings for the PCE price index to print a 1.9% year-on-year increase by the end of the year. Unfortunately, both the headline and core readings deteriorated for the second consecutive month, with the core reading rising at the slowest annual pace in 16 months.
The market was expecting worse, though, which is why rate hike expectations remain elevated despite the deteriorating readings.
As for the labor market, it’s presenting a mixed picture since the jobless rate continues to improve. However, the “improved” readings for the jobless rate are partly because due to the slipping participation rate. Also, recent jobs growth isn’t exactly stellar. Wage growth, meanwhile, continues to decelerate on a year-on-year basis. And that’s a threat to consumer spending and, by extension, inflation.
Overall, the prospects for faster U.S. economic growth in Q2 look optimistic. Inflation is a bit problematic, though, since the Fed’s expected pick up in wage growth hasn’t really materialized yet. As for the labor market, it’s presenting a mixed picture, although some Fed officials would probably interpret the falling participation rate and reject weakness in jobs growth as signs that the economy is approaching full employment.