Hey there, forex friends! We’ve got another FOMC Wednesday coming our way (June 15, 6:00 pm GMT), so as a heads up, I thought that it would be prudent to give y’all a snapshot of how the U.S. economy is doing lately.
Note: As with all Economic Snapshots, there are nifty tables at the bottom, so you can skip to those if you’re a forex trader who’s in a hurry. However, the bullet points provided highlight the underlying details and trends that give the numbers their proper context.
- The second quarter-on-quarter estimate for Q1 2016 GDP growth was upgraded from an anemic +0.5% to a less anemic +0.8%.
- This is still a significant slowdown from Q4’s +1.4% expansion.
- Quarter-on-quarter GDP has been growing at a slower pace for the third consecutive month now, after peaking at +3.9% back in Q2 2015.
- At least the year-on-year growth of +2.0% was maintained.
- Annual GDP growth had been slowing down during the three previous quarters, with the peak at 2.9% during Q1 2015.
- Consumer spending or “personal consumption expenditure” is still the backbone of the U.S. economy, but it grew at a slower pace in Q1 2016 (1.9% vs. 2.4% previous), so its positive contribution to quarter-on-quarter GDP growth was smaller as well (+1.29% vs. 1.66% previous).
- Consumer spending has been growing at an ever weakening rate for the third quarter running, peaking at 3.6% back in Q2 2015.
- Private investment contracted by 2.6%, subtracting 0.45% from Q1’s quarter-on-quarter GDP growth (-0.16% previous).
- The contraction in private investment was due to a 6.2% drop in business investment.
- Private investment has been contracting at an ever faster rate for the third quarter now: -0.7% in Q3 2015, -1.0% in Q4 2015, and -2.6% in Q1 2016.
- Net trade continues to be a drag on the U.S. economy, thanks to a 2.0% decrease in exports, which subtracting 0.21% from quarter-on-quarter growth.
- Government spending jumped from 0.1% to 1.0% in Q1 2016, which added 0.20% to quarter-on-quarter GDP growth.
- Non-farm employment only saw a net increase of 38K in May, which is way below the expected 160K.
- Not only that, the reading for April was downgraded to 123K from 160K.
- The reading for March was also downgraded to 186K from 208K originally.
- The U.S. economy has been gaining jobs for the 68th straight month now, but the current reading is the smallest net increase since September 2010.
- The service sector continued to provide most of the jobs, but job growth in the service sector has been weakening for two consecutive months now.
- Only 61.4K jobs were added by the service sector in May (+140K previous), due mainly to a large 34K drop in the information services industry.
- However, this may be temporary because “About 35,000 workers in the telecommunications industry were on strike and not on company payrolls during the survey reference period.”
- However, most of the service sector jobs came from low-income industries (minimum wage in fact) such as retail trade (gas station attendants, retail clerks, etc.) and food services (waitresses, burger flippers, etc.).
- Job shedding in the higher-paying manufacturing resumed, losing 10.6K jobs after adding 1.3K jobs previously.
- Despite the disappointingly small net increase in non-farm jobs, the jobless rate dropped from 5.0% to 4.7%, which is the lowest reading since November 2007.
- This was due to the exodus of 664K people out of the labor force, which pushed the number of working-age people who are not in the labor force to a record high of 94,708K.
- It also pulled the labor force participation rate to a five-month low of 62.6%.
- The labor force participation rate has been sliding lower for the second straight month, after peaking at a two-year high of 63.0%.
- The headline month-on-month CPI reading accelerated from 0.1% in March to a three-year high of 0.4% in April.
- The headline month-on-month CPI reading has been increasing at a faster pace for the second month running.
- Meanwhile, the year-on-year headline reading came in at 1.1% (0.9% previous), ending two straight months of weaker increases.
- The annual core reading continued trending lower for the second month in a row, however, coming in at 2.1% (2.2% previous).
- Energy-related components are still the main drag to the headline year-on-year reading, but they were less of a drag in April (energy index down -8.9%) compared to March (energy index down -12.6%), which actually helped to improve the annual headline reading.
- The annual core reading ticked lower for the second straight month, thanks to another 0.6% drop in the price of clothing and a 1.5% slump in the price of used vehicles (-0.6% previous).
- On a monthly basis, the faster increase was actually due to a 3.4% surge in the energy index (0.9% previous), thanks mainly to the 8.1% increase in the price of gasoline (2.2% previous).
Business Conditions & Sentiment
- Total industrial output contracted by 1.1% year-on-year in April, but it’s an improvement over the previous month’s 1.9% contraction.
- Annual industrial output has also been in negative territory for eight consecutive months now, but the current reading ended two straight months of ever bigger contractions.
- Month-on-month, total industrial output expanded by 0.7%, which is the fastest monthly growth since November 2014.
- Lower mining output is the main drag for both the annual and monthly readings.
- Manufacturing output, meanwhile, rebounded by 0.3% on a monthly basis (-0.3% previous) and ticked higher on an annual basis (+0.4% vs. +0.3% previous).
- Looking forward, factory orders increased by 1.9%, which is the biggest increase since October 2015 and would hopefully mean higher manufacturing output.
- ISM’s manufacturing PMI reading for May advanced to 51.3 after dipping to 50.8 back in April.
- However, the manufacturing production sub-index dropped from 54.2 to 52,6, so there’s a possibility that manufacturing production will also ease.
- Markit’s PMI report is less upbeat since its manufacturing PMI reading came in at 50.7, which is the weakest reading in over six-and-a-half years.
- Commentary from the report noted that production entered negative territory for the first time since September 2009 while new orders increased at the slowest pace since December 2015.
- Moving on, ISM’s non-manufacturing PMI reading tumbled from 55.7 to a 27-month low of 52.9 in May.
- Most sub-indices contributed to the drop in the headline reading.
- Notably, business activity dropped from 58.8 to 55.1 while new orders slumped from 59.9 to 54.2.
- The headline reading is still above the 50.0 stagnation level, though, so business conditions are still positive and the non-manufacturing sectors continue to grow.
- As for Markit’s services PMI report, its reading for May came in at 51.3, which is a bit lower than the previous 52.8 reading.
- Commentary for the report noted that activity and business growth both slowed down, which corroborates ISM’s non-manufacturing PMI report.
- Retail sales in April jumped by 1.3% month-on-month (-0.3% previous), which is the biggest increase in just over a year.
- Year-on-year, retail sales grew by 3.0% after slowing to 1.7% previously.
- The core reading, meanwhile, increased by 0.8%, which is the fastest increase in 11 months.
- The month-on-month increase was broad-based; only building materials and garden equipment dealers reported a decrease.
- The year-on-year increase was also broad-based, but the past declines in oil prices continued to weigh down on the value of retail sales from gasoline stations.
- Moving on, personal income from all sources increased by 0.4% in April, the same rate of increase as the previous month.
- Adjusted for inflation, however, real personal income only increased by 0.2%, a downtick from the previous month’s 0.3% increase.
- Nonetheless, personal spending jumped by 1.0% after stagnating in the previous month.
- This is the fastest rise since August 2009.
- The increase was mostly due to a 1.7% increase in spending on goods (0.2% previous), which lines up nicely with the jump in retail sales.
- Expenditure on services also increased by 0.6%, after stagnating in the previous month.
- The U.S. trade deficit widened to $37.44 billion in April (-$35.55 billion previous).
- Exports actually increased by 1.46% to a four-month high of $182.80 billion, but this was overwhelmed by the imports increasing by 2.10% to $220.23 billion.
- This is not necessarily a bad thing since the rise in imports was due to capital goods increasing by 5.32% to a six-month high of $49.59 billion, which would likely boost the business investment component of GDP, as well as economic output down the road.
Putting it all together
Q1 GDP growth was a bitter disappointment, but Fed officials probably won’t dwell on that and look forward instead. And looking at the economic indicators that I covered above, it looks like Q2 is starting off on a very solid footing since consumer spending, which has been the backbone of the U.S. economy, increased at the fastest pace since August 2009 in April, the first Q2 month.
Trade is a disappointment on the surface, but digging a little deeper shows that imports of capital goods increased substantially, which would likely boost business investment, and hopefully translate to higher output down the road.
Speaking of output, total industrial output printed the fastest monthly growth since November 2014, which is another good sign that Q2 is starting off with a bang.
Also, headline inflation is looking pretty solid. And as we already know from the April FOMC minutes, the Fed is open to hiking further if three economic conditions are met, which are as follows:
- A pickup in growth
- Improving labor market conditions
- Stronger inflation readings
Taking into account what I already talked about, we can check off the first and third items on the Fed’s checklist, which leaves us with the second item – improving labor market conditions.
Unfortunately, labor indicators are not that impressive, with the readings for May being particularly horrible. The U.S. economy is nearing full employment, though, so wages are now in focus, and wages have been steadily growing… so far.
Moreover, Fed Head Yellen tried to shrug off the dismal May NFP report, saying in her June 6 speech that “one should never attach too much significance to any single monthly report.” It would be interesting to know what other Fed officials think, though.