Hello, forex friends! As Pip Diddy noted in his latest Top Forex Market Movers of the Week, the Greenback was the main winner last week. And since we’ve got another FOMC statement coming up this Wednesday (July 27, 6:00 pm GMT), I thought that now would be a good time to give y’all a snapshot on how the U.S. economy is doing.
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 final quarter-on-quarter estimate for Q1 2016 GDP growth was upgraded yet again from +0.8% to +1.1%, a significant improvement over the anemic first estimate of +0.5%.
- This is still a slower when compared to Q4’s +1.4% quarterly growth rate.
- 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.
- The final year-on-year estimate was also revised upward to 2.1% from +2.0% for both the first and second estimates.
- The revised reading ends the trend of slowing growth during the three previous quarters, with the peak at 2.9% during Q1 2015.
- The final estimate for consumer spending or “personal consumption expenditure” was revised lower from 1.9% to 1.5%.
- Consumer spending is still the backbone of the U.S. economy, but it grew at a slower pace in Q1 2016 (1.5% vs. 2.4% previous), so its positive contribution to quarter-on-quarter GDP growth was smaller as well (+1.02% 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.
- On an upbeat note, the contraction in private investment was revised from a painful 2.6% to a less painful 1.8% fall.
- The contraction in private investment subtracted 0.29% from Q1’s quarter-on-quarter GDP growth (-0.16% back in Q4).
- The contraction in private investment was due to a 4.5% 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 -1.8% in Q1 2016.
- The main reason for the upward revision for the quarter-on-quarter reading was that net exports originally subtracted 0.21% from GDP growth, but it was revised to show a positive contribution of 0.12%.
- This ends two straight quarters of negative contributions from trade.
- The positive revision was due to exports being revised to a positive reading (+0.3% vs. -2.0% originally) and imports being revised to show a bigger decline (-0.5% vs. -0.2% originally).
- Government spending jumped from 0.1% to 1.3% in Q1 2016, which added 0.23% to quarter-on-quarter GDP growth.
- Non-farm employment rebounded with a solid net increase of 287K in June, which is much higher than the expected 175K and the highest reading in eight months.
- However, the dismal 38K reading for May, which was already a multi-year low, was downgraded to show an even more dismal 11K increase.
- The downgrade was due to manufacturing losing more jobs than originally estimated (-16.0K vs. -10.6K originally) and a downgrade in the number of service sector jobs generated (+35.0K vs. +61.4K originally)
- The U.S. economy has been gaining jobs for the 69th straight month now.
- The service sector continued to provide most of the jobs, generating 256K jobs in June.
- However, a large chunk of the jobs generated came from lower-paying industries (minimum wage even), such as retail trade (+29.9K), accommodation and food services (+31.1K), art, entertainment, and recreation (+27.2K), and administrative and waste services (+16.3K).
- The higher-paying manufacturing sector added 16K jobs in June.
- However, the bulk of the job gains came from the lower-paying food manufacturing industry (+13K).
- For reference, the average hourly earnings for the entire manufacturing industry is $25.96, while the average hourly earnings for the food manufacturing industry is $19.92.
- Despite the relatively large net increase in non-farm jobs, the jobless rate climbed higher from the multi-year low at 4.7% to 4.9%.
- This was due to an influx of 414K people who joined or rejoined the labor force, which caused the labor force participation rate to tick higher from 62.6% to 62.7%.
- The uptick in the labor force participation breaks a two-month slide, but is still a few ticks away from the recent peak at 63.0%, which is a two-year high.
- Average hourly earnings only grew by 0.08% month-on-month, significantly slower than the 0.24% increase that was registered in May.
- The anemic wage growth was very likely partially due to the increase in lower-paying jobs, which depressed overall wage growth.
- Wage growth has been slowing on a monthly basis for two straight months now.
- But wage growth is steady on an annual basis at least, it even grew at a faster pace in June (2.60% vs. 2.48% previous).
- Headline month-on-month CPI increased by 0.2% in June, matching the previous month.
- The headline year-on-year reading, meanwhile, printed a 1.0% increase, the same as last time.
- As for the core reading, it increased by 2.3% year-on-year (2.2% previous), which is a four-month high and marks the second straight month of faster increases.
- The annual core reading continued trending lower for the second month in a row, however, coming in at 2.1% (2.2% previous).
- The main driver for the month-on-month increase was the 0.3% increase in rent (+0.4% previous) and the 1.3% increase in energy prices (1.2% previous), thanks to the 3.3% increase in the cost of oil and other energy commodities (+2.4% previous).
- These were offset mainly by the 0.1% decline in food prices (-0.2% previous), and the 0.2% fall (-0.2% previous) in non-food and non-energy commodities like clothing and vehicles.
- Year-on-year, energy is still a major drag in June, but not as much when compared to May (-9.4% vs. -10.1% previous).
- The uptick in the annual core reading was due to the 3.5% increase in rent, which is a tick higher than the previous month’s 3.4% annual increase.
- The rise in rent may be trivial, but rent accounts for around 33% of CPI, so, yeah, it’s huge chunk.
Business Conditions & Sentiment
- Total industrial output contracted by 0.7% year-on-year in June, which is the smallest decline in eight months and an improvement over the 1.4% slump that was printed in May.
- Annual industrial output has also been in negative territory for ten consecutive months running, though.
- Month-on-month, total industrial output advanced by 0.6%, which is fastest monthly expansion since July 2015.
- The monthly growth in industrial output was broad-based, with mining, manufacturing, and utilities reporting gains.
- Year-on-year, the 10.5% drop in mining output was the major drag, but it’s less than the 11.5% drop in May, which is one of the major reasons why the drop in industrial output in June was softer.
- Manufacturing output, meanwhile, recovered by 0.4% on both a monthly and annual basis.
ISM’s manufacturing PMI reading for June climbed to 53.2 (51.3 previous), which is the best reading in a year.
- The improvement was pretty broad-based too, with the new orders index, in particular, increasing to 57.0 from 55.7, which means higher demand and more manufacturing activity.
- Overall, industrial output during the Q2 months are an improvement when compared to the Q1 months, which will likely support GDP growth.
- ISM’s non-manufacturing PMI, meanwhile, jumped from 52.9 to 56.5, which is the highest reading since November 2015.
- The improvement in the non-manufacturing sector was also broad-based, with new orders shooting up from 54.2 to 59.9.
- Markit’s flash PMI report for July is also upbeat since it came in at 52.9, which is the best reading since November 2015.
- Commentary from the report was even more upbeat since it noted that new orders expanded at the fastest pace since October 2015 while employment growth was the strongest in a year.
- As for Markit’s final services PMI report for June, its reading came in at 51.4, which is a very slight improvement over the previous month’s 51.3 figure.
- Commentary for the report noted new orders grew at the fastest pace since January, but while employment continued to grow, it increased at the weakest pace in 17 months.
- Personal income from all sources increased by 0.2% in May, which is slower than the 0.5% increase in April.
- It looks even worse when adjusted for inflation, since real personal income was almost stagnant at 0.1%, lower than the previous 0.2% increase.
- As a result, personal spending only increased by 0.4%, drastically lower when compared to the 1.1% increase in April.
- Nonetheless, the readings for total personal spending during the available Q2 months are still better when compared to the near-stagnant growth during the Q1 months.
- Moving on, retail sales in June increased by 0.6% month-on-month after dipping to 0.2% from a one-year high of 1.3%.
- This is the third straight month that retail sales grew, which means retail sales grew during all the Q2 months, which is way better when compared to the two contractions registered during the Q1 months.
- Year-on-year, retail sales grew by 2.7% after slowing from 3.0% to 2.5% previously.
- The core reading, meanwhile, increased by 0.7% after previously dipping from an 11-month high of 0.8% to 0.4%..
- Overall, the retail sales readings for the the Q2 months look impressive when compared to the Q1 months.
- The U.S. trade deficit widened to $41.14 billion in April (-$37.38 billion previous).
- The wider deficit was due to slight contractions in exports (-0.17% vs. +0.82% previous), although imports also grew at a slower pace (+1.57% vs. +2.01% previous).
- The contraction in exports, in turn, was due to the 15.59% slump in exports to the U.K., and exports to the U.K. account for about 19.15% of U.S. export to the E.U. and about 3.55% of total U.S. exports.
Putting it all together
The final estimate for Q1 GDP growth turned out to be less of a disappointment, but the fact still stands that GDP growth has been slowing down. However, the available data for the Q2 months point to a bounce in Q2.
And for those of you who are preparing for the FOMC statement, recall that the minutes of the June FOMC meeting revealed that Fed officials “weighed a number of considerations in assessing the conditions under which it would be appropriate to increase the target range for the federal funds rate,” and that “Most judged that they would need to accumulate additional information on the labor market, production, and spending.”
Looking at the labor market, the rebound in employment was awesome, but the quality of the job gains was not that awesome, which is likely one of the reasons why jobs growth almost stagnated. The Fed doesn’t really seem to look at the quality of the jobs, though, so that may not matter much, and they’ll probably heap praises on the employment rebound and higher participation rate instead.
Moving on to production, industrial production during the Q2 months was pretty good, at least when compared to the Q1 months, and the PMI readings are pretty solid, with Markit’s July manufacturing PMI hinting that Q3 is off to a good start, not to mention the increase in new orders in June.
As for spending, available total personal spending data for the Q2 months showed respectable increases, which is better than the near-stagnation during the Q1 months. The only dark spot was the dip in personal income from all sources, but that didn’t seem to dent retail sales in June. Also, retail sales grew during all the Q2 months, so consumer spending seems to be doing okay.
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