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Hello, forex friends! We’ve got another FOMC statement coming up on Wednesday, so I thought that now would be a good time for another Economic Snapshot to give y’all an idea of how the U.S. economy has been faring lately.

Growth

  • The final estimate for U.S. Q1 2017 GDP growth came in at 1.4% quarter-on-quarter annualized (0.35% unannualized).
  • This is an upward revision from the second estimate of 1.2%.
  • Even so, it’s still the weakest quarterly growth in three quarters and marks the second consecutive quarter of slowing growth.
  • The upward revision primarily reflected upward revisions to consumer spending (+1.1% vs. +0.6% previous) and to exports (+7.0% vs. +5.8% previous).
  • These were partly offset by a downward revision to gross private fixed investment (+3.7% vs. +4.8% previous).
  • Despite the upgrade to consumer spending in Q1 2017, it’s still much weaker compared to consumer spending in Q4 2016 (+1.1% for Q1 2017 vs. +3.5% for Q4 2016) and is the major reason for the slowdown in quarterly GDP growth.
  • The slower growth in gross private investment was also a major reason for slowdown (+3.7% vs. +9.4% previous).
  • However, it should be pointed out that the poor growth in gross private investment came mainly from the slump in inventories, which subtracted 1.11% from annualized quarterly GDP growth after adding 1.01% previous.
  • All other sub-components of the gross private investment component actually grew at a faster rate.
  • Non-residential fixed investments, for example, grew by 10.4% (+0.9% previous).
  • Residential fixed investements, meanwhile, increased by 13.0% (+9.6% previous).
  • Anyhow, net trade was able to partially offset the weakness from the above two GDP components, thanks to exports rising by 7.0% (-4.5% previous) while imports only rose by 4.0% (+9.0% previous).
  • Year-on-year GDP grew by 2.1% in Q1 2017, which is the fastest rate of annual expansion as in six quarters.
  • This also marks the third consecutive quarter of faster annual growth.
  • As such, the U.S. economy is doing better compared to a year ago, even though quarterly GDP growth has been slowing in 2017.
  • Moreover, GDP growth is on track to hit the Fed’s forecasted 2.2% growth in 2017.

Employment

  • The U.S. economy generated 222K non-farm jobs in June, which is more than the 175K to 177K expected.
  • Even better, the reading for May was upgraded from 138K to 152K while the reading for April was upgraded from 174K to 207K.
  • That’s 47K more jobs than originally estimated.
  • And while the jobless rate deteriorated from 4.3% to 4.4%, it’s not so bad since the labor force expanded when the participation rate improved from 62.7% to 62.8%.
  • This is the first rise in the participation rate after two months of declines and may signal better economic and labor conditions.
  • Even so, the the number of unemployed people rose by 116K to 6,977K, which means that the U.S. economy wasn’t able to fully absorb the influx of 361K new or returning workers.
  • And that’s why the jobless rate ticked higher.
  • As for wage growth, average hourly earnings increased by 0.15% month-on-month in June.
  • This is a bit faster than the 0.11% recorded in May.
  • However, May’s reading was actually downgraded from +0.15%.
  • On a year-on-year basis, average hourly earnings increased by 2.46%.
  • This is fater than the +2.42% rise in May.
  • However, the annual reading for May was also downgraded from 2.46%.
  • Also, this marks the third month of slower wage growth, at least on a year-on-year basis.
  • Moreover, the faster reading in June is still the second weakest reading in 19 months.

Inflation

  • The core PCE price index (y/y) is the Fed’s preferred measure for inflation.
  • And with that out of the way, the headline PCE price index fell by 0.06% month-on-month in May (+0.17% previously).
  • The core reading, meanwhile, rose at a slower 0.07% pace (+0.13% previous).
  • Year-on-year, the headline PCE price index rose by 1.44% in May.
  • This is the slowest annual reading in six months.
  • Moreover, it’s some distance away from the Fed’s 2017 forecast of +1.6%.
  • As for the core PCE price index, it increased by 1.39%.
  • This is the poorest reading in 17 months and is veering away from the Fed’s rather optimistic forecast of 1.7%.
  • Moreover, the annual reading for the core PCE price index has been trending lower for four consecutive months now.
  • And things may get worse since both the monthly and annual core readings for CPI eased slightly further in June.

Business Conditions & Sentiment

  • Markit’s manufacturing PMI reading eased further from 52.7 to 52.0 in June.
  • This is the lowest reading in 10 months.
  • Also, this marks the fifth consecutive month of deteriorating readings.
  • According to Markit, the weaker reading was due to “output, new order and employment growth all slowing since May.”
  • ISM contradicts this since the headline reading for ISM’s manufacturing PMI jumped from 54.9 to 57.8, which is a 31-month high.
  • Also, ISM’s new orders, production, and employment indices printed improvements.
  • Moreover, total industrial output in the U.S. expanded by 0.4% month-on-month in June, thanks largely to the recovery in manufacturing output (+0.2% vs. -0.4% previous).
  • Moving on, Markit’s services PMI reading continues to improve, rising from 53.6 to 54.2 in June.
  • This is a five-month high and marks the third consecutive month of ever better readings.
  • Markit attributed the higher reading to “accelerations in new order and employment growth.”
  • ISM agrees with Markit on this one since ISM’s non-manufacturing PMI reading also improved from 56.9 to 57.4 in June.
  • ISM also agrees with the faster growth in new orders since the new orders sub-index jumped from 57.7 to 60.5.
  • However, ISM disagreed on faster employment growth since the employment index eased from 57.8 tp 55.8.

Consumer Spending

  • Personal income from all sources increased by 0.4% month-on-month in May (+0.3% previous).
  • In real terms (inflation is taken into account), personal income grew faster at 0.5% month-on-month (+0.2% previous), thanks to negative monthly inflation in May.
  • The bigger increase in real personal income apparently translated to stronger consumer spending since total personal spending rose by 0.3% in May (+0.1% previous).
  • However, retail sales fell by 0.1% month-on-month in May, so spending was more focused on services rather than goods.
  • Speaking of retail sales, the total value of retail sales fell by 0.2% month-on-month in June.
  • This is a bigger monthly decrease when compared to the 0.1% monthly fall in May.
  • Even so, total retail sales for all of Q2 is 0.24% more compared to retail sales in Q1, so retail sales will still likely have a small positive contribution to Q2 GDP growth.

Trade

  • The U.S. trade deficit narrowed from $47.585 billion to $46.507 billion in May.
  • The narrower trade gap was due to exports growing by 0.45% month-on-month, although the 0.09% fall in imports also helped.
  • Also worth noting is that is the first increase in exports after two months of contractions.
  • This is nice but the deficit for the first two months of Q2 is already 0.42% bigger compared to the deficit during the first two months of Q1.
  • As such, the trade deficit needs to narrow even further in June.
  • Otherwise, trade may be a drag on Q2 GDP growth.
  • Moreover, the year-on-year reading for exports printed a 4.49% increase in May.
  • This marks the third consecutive month that growth in exports have been slowing.
  • Also, the year-on-year reading for imports have been slowing for three consecutive months as well.
  • And unfortunately, weaker imports of consumer goods is the culprit, which implies that consumer spending is weakening.

Putting it all together

 

June FOMC Meeting Economic Forecasts
June FOMC Meeting Economic Forecasts

In my 6 Highlights from the June FOMC Statement, I pointed out that the Fed upgraded its growth projections and downgraded its inflation forecasts.

And given how the economic data have evolved since then, it looks like the Fed was right to downgrade its forecasts for inflation since the core PCE price index, the Fed’s preferred measure for inflation, only printed a 1.39% year-on-year increase in May. This is a 17-month low and is some distance away from Fed’s forecast of 1.7% by the end of the year. And remember, the Fed’s original forecast was a rather optimistic 1.9%.

Not only that, CPI is hinting that the core PCE price index would weaken further in June. As such, those Fed officials who have been expressing concern over inflation were right. Heck, even Fed Chair Yellen herself expressed more caution on inflation during her recent testimonies.

There is a sliver of hope, though, since wage growth finally saw a year-on-year increase in June. However, it has yet to be seen if this is sustainable or just a fluke. Also, wage growth is still very subdued.

As for growth, the picture is a bit mixed on that one. So far, the available data for total personal spending is pointing to stronger consumer spending. However, trade will likely be a drag unless exports pick up or imports shrink further to cause the trade deficit to narrow further in June.

Regarding the labor market, the Fed expects the jobless rate to come in at 4.3% by the end of the year, which is an improvement to its original forecast of 4.5%.

Unfortunately, the jobless rate worsened from 4.3% to 4.4% in June. But on the bright side, almost other labor market indicators showed improvements. And besides, the higher jobless rate was partly due to the higher participation rate, so it ain’t that bad.