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Hello, forex friends! With Yellen scheduled to give a talk at the Jackson Hole Symposium on Friday, and forex traders eagerly to hear what Yellen has to say, I thought that now would be a good time for a quick economic roundup to give y’all an overview of how the U.S. economy has been faring lately.

Growth

  • The advanced or first reading for U.S. Q2 2017 GDP growth was 2.6% quarter-on-quarter annualized (0.64% not annualized).
  • 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 quarterly reading was driven mainly by stronger consumer spending (+2.8% vs. +1.9% previous).
  • Private investment also gave GDP growth a boost after being a drag in Q1 (+2.0% vs. -1.2% previous).
  • Net trade was a drag, though, mainly because exports weakened (+4.1% vs. +7.3% previous).
  • Year-on-year GDP grew by 2.1% in Q2 2017, which is 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 on track to hit the Fed’s forecaste of 2.2% growth in 2017.
  • Looking at the details, consumer spending was actually weaker on a year-on-year basis (+2.6% vs. +2.9% previous).
  • However, the weakness in consumer spending was more than offset mainly by stronger private investment grew (+2.9% vs. +1.7% previous).

Employment

  • Non-farm payrolls in the U.S. increased by 209K in July, which is less than the 231K increase in June.
  • The consensus was only a 180K increase, though, so the reading still good.
  • Also, jobs growth has averaged 184K per month this year, which is above the 100K per month needed to keep up with working-age population growth.
  • The jobless rate, meanwhole, ticked lower from 4.4% to 4.3%.
  • And it’s a healthy downtrend since the labor force participation rate in July actually climed to a three-month high of 62.9% even as the number of unemployed Americans fell from 601K to 775K.
  • This means that more Americans joined or rejoined the labor force and the U.S. economy was able to adsorb this influx of new and returning workers (and then some).
  • As for wage growth, average hourly earnings increased by 0.34% month-on-month in June.
  • This is slightly faster than the +0.3% consensus.
  • Moreover, this is a faster than the previous month’s 0.19% rise.
  • Not only that, this is also the strongest monthly increase in nine months and marks the second month of stronger monthly wage growth to boot.
  • Also, the previous reading was even upgraded from +0.15% to +0.19%.
  • Year-on-year, average hourly earnings rose by 2.53% in July, which is marginally slower compared to the 2.54% previous.

Inflation

  • The core PCE price index (y/y) is the Fed’s preferred measure for inflation.
  • Having said that, the headline PCE price index rose by 0.02% month-on-month in June (-0.03% previously).
  • The core reading, meanwhile, printed a marginally faster 0.11% increase after slowing from 0.17% to 0.10% in May.
  • Year-on-year, the headline PCE price index rose by 1.42% in May.
  • This is the slowest annual reading in nine months and marks the fourth month of poorer annual readings.
  • Moreover, the headline reading is veering away from the Fed’s 2017 forecast of +1.6%.
  • On the more upbeat note, the core PCE price index maintained its annual pace of 1.50% in June.
  • The steady reading puts an end to four consecutive months of weaker readings.
  • On a more downbeat note, the 1.50% increase in May and June are the weakest year-on-year increases since December 2015.
  • It’s also still some distance away from the Fed’s forecast of 1.7% for this year.
  • Looking forward, CPI rose by 0.11% month-on-month in July (-0.02%).
  • The recovery was driven by the 0.2% rise in food prices (+0.0% previous) and the softer fall in energy costs (-0.1% vs. -1.6% previous).
  • Unfortunately, the food and energy prices are stripped the core reading, and so the core reading fell by 0.03% after printing a 0.07% rise previously.
  • Year-on-year, however, CPI rose by 1.73% (+1.65% previous).
  • This puts an end to four straight months of deteriorating annual readings for headline CPI.
  • The annual reading for core CPI, meanwhile, printed a marginally slower 1.69% rise (1.70% previous).
  • The weakness is only marginal, but it still marks the sixth consecutive month of weaker core readings.

Business Conditions & Sentiment

  • Markit’s manufacturing PMI reading jumped from 52.0 to a four-month high of 53.3 in July.
  • This puts an end to five consecutive months of deteriorating readings.
  • According to Markit, the stronger reading “was largely driven by marked and accelerated expansions in both output and new orders.”
  • Morover, “firms added to their payrolls and raised purchasing activity at the quickest rates since February.”
  • ISM’s manufacturing PMI report contradicts Markit’s finding since the headline reading for ISM’s manufacturing PMI eased from 57.8 to 56.3.
  • Also, the weaker reading was due to weaker readings for the new orders, production, and employment sub-indices, which further highlights the disparity between ISM’s and Markit’s manufacturing PMI reports.
  • Looking at the “hard” data, total industrial output in the U.S. expanded by 0.2% month-on-month in July.
  • This is a weaker increase compared to the previous month’s +0.4%.
  • Also, the weaker industrial output was thanks largely to the manufacturing output falling by 0.1% after rising 0.2% previously.
  • As such, ISM’s finding seem to be more accurate.
  • Moving on, Markit’s services PMI reading to improved further, rising from 54.2 to 54.7 in July.
  • This is a six-month high and marks the fourth consecutive month of ever better readings.
  • According to Markit the slightly better reading in July was due to “New orders received by firms [increasing] at the fastest pace for two years.”
  • In addition, “firms increased their staff numbers at the quickest pace since last December.”
  • ISM disagrees with Markit on this one as well since ISM’s non-manufacturing PMI reading dropped from 57.4 to 53.9 in July.
  • And the drop was broad-based, since most sub-indices took hits.
  • Both Markit and ISM agree that input prices have been rising, though.
  • However, ISM is silent on whether or not companies pass on their higher costs.
  • Markit, meanwhile, reported that companies are passing on higher input prices, but average price increase of products sold and services rendered was only modest.

Consumer Spending

  • Personal income from all sources was flat month-on-month in June (+0.3% previous).
  • In real terms (inflation is taken into account), personal income fell 0.1% month-on-month (+0.4% previous).
  • This is the first negative reading since November 2016.
  • Given the fall in real income, total consumer spending weakened in June, although retail sales recovered.
  • Speaking of retail sales, the total value of retail sales increased by 0.5% month-on-month in July.
  • This is a bigger monthly increase compared to 0.1% monthly rise in June and is a good start for Q3 GDP growth.
  • The increase was also broad-based with only 10 of the 13 retail store types printing higher retail sales while the remaining 3 reported declines in sales.
  • As such, the core estimate also printed a stronger reading in July.
  • The year-on-year reading is also looking swell since it bounced by 4.2% after slowing to 3.4% previously.

Trade

  • The U.S. trade deficit widened from $46.391 billion to $46.642 billion in June.
  • The wider trade gap was due to the 0.94% increase in imports (+0.88% previous), which was able to more than offest the 1.23% increae in exports (+0.44% previous).
  • June’s trada data haven’t been incorporated into the advanced estimate for Q2 GDP yet.
  • It should be noted that the advanced estimate for Q2 GDP growth estimated that exports grew at a slower pace of +4.1% quarter-on-quarter annualized.
  • This is around 1.0% if not annualized.
  • Imports, meanwhile, was estimated as having increased at a slower 2.1% quarter-on-quarter annualized pace.
  • If not annualized, then is around 0.5% quarter-on-quarter.
  • However, if the trade data in June is taken into account, then exports only grew by 0.51% quarter-on-quarter in Q2, which is only half of the estimate used in the advanced Q2 GDP report.
  • Imports, meanwhile, increased by 1.77% quarter-on-quarter, which is three time bigger than the 0.5% estimate.
  • As such, trade will likely be a bigger drag on Q2 GDP growth than was originally estimated.

Putting it all together

June FOMC Meeting Economic Forecasts
June FOMC Meeting Economic Forecasts

U.S. GDP growth rebounded quarter-on-quarter and picked up the pace year-on-year in Q2 2017, so it looks the Fed made the right call when it upgraded its growth projections, as discussed in my 6 Highlights from the June FOMC Statement.

However, it should be pointed out that the advanced reading for Q2 GDP growth estimated that exports grew by 1.0% quarter-on-quarter while imports rose by a softer 0.5%. But now that we have the trade data for June, we know that exports actually grew at a softer 0.51% pace while imports surfed by 1.77%.

As such, trade will likely be a bigger drag than originally estimated and a downward revision is likely when the second estimate is finally released.

Looking forward, Q3 growth is off to a good start since retail sales rebounded in July.

Moving on the labor market, Q3 is also off to a good start in that aspect since jobs growth remained robust. However, the most noteworthy bit was the stronger rise in wage growth, at least on a monthly basis. The year-on-year reading for wage growth, meanwhile, remains subdued. But it has steadied somewhat at least.

As for inflation, the Fed downgraded its forecasts back in July. And it looks like the Fed was right on this one as well since the PCE price index continued to weaken on a year-on-year basis. Also, the annual core readings for May and June were the weakest since December 2015.

There is some glimmer of hope, though, since the CPI readings for July printed a monthly increase. The 1.73% year-on-year increase printed by the headline reading, meanwhile, puts an end to four straight months of deteriorating readings.

It remains to be seen what Yellen thinks about this, but the more dovish FOMC members (Kashkari and friends) out there were not to optimistic about the recent CPI report.