Today's shockingly weak Q216 GDP print underscores that US economic growth slowed sharply since last fall. It argues against a September Fed rate hike.
a. The shockingly low 1.2% (q/q, saar) increase in Q216, after a downward-revised 0.8% in Q116, is the 3rd quarter in a row that Real GDP Growth was under 1.5%. Real GDP Growth averaged a meager 1.0% over the Q415-Q216 period.
b. Prior to this, Real GDP Growth averaged 2.2% over the first 3 quarters of 2015 and 2.5% over 2014.
Much of the weakness since Q415 has been in business investment -- capital spending, oil drilling and, in Q216, inventory investment. Besides the drag from the oil sector, businesses look to have been quite cautious about the outlook.
a. Some of the caution may have been in response to weak growth abroad and uncertainty about the upcoming Presidential election. However, it also could have been in response to fears of Fed tightening ahead and to the implications of some of Obama's executive orders or agency rulings on items like net neutrality of the internet. In any case, the slowdown coincided with both the Fed tightening through forward guidance and Obama's actions.
While some Street economists may argue that the Q2 GDP composition -- particularly the weak inventory investment -- bodes well for Q316 GDP, the reasons behind the Q216 weakness still exist. Moreover, the strength of Consumer Spending in Q216 will probably not repeat itself in Q316. So, another sub-2.0% GDP Growth Rate in Q316 may be in the cards.
The inflation side of the GDP report was benign and also argues against a September Fed rate hike.
a. The Core PCE Deflator slowed to 1.7% (q/q, saar) in Q216 from 2.1% in Q116.
b. The Market-Based Core PCE Deflator slowed to 1.6% from 1.8%.
c. While the Total PCE Deflator sped up to 1.9% from 0.3%, this was due to the jump in oil prices -- which have subsequently fallen sharply.
Even more disturbing than the below-expected print for Q2 Real GDP is the possibility that the near-1.0% pace may be near the potential growth rate. This does not bode well for an improving trend in US standard of living.
a. The 1.0% average pace since Q416 has been associated with an essentially steady Unemployment Rate of around 5.0%.
The low Q216 print was a bad miss for the Fed's Nowcasting GDP Models.
a. These models had projected 2.2-2.4%, although the Atlanta Fed's model lowered its forecast to 1.8% yesterday after the Commerce Department released preliminary data for the June Trade Balance and Business Inventories.
b. One reason for the high estimates may be a problem with at least one of the proxies the models use for missing data. In particular, the Atlanta Fed uses the Mfg ISM (total index and inventory component) to estimate Nonfarm Inventory Investment. I have never found the Mfg ISM to be a reliable predictor of q/q changes in GDP or Nonfarm Inventory Investment.
Friday, July 29, 2016
Wednesday, July 27, 2016
June Durable Goods Orders Disappoint
June Durable Goods Orders were disappointing, as they failed to catch up to the strength seen in recent manufacturing surveys. They could be showing that companies are not investing in new capital equipment, despite some improvement in sentiment. Or, they could be showing that demand from abroad for US durable goods continues to be hurt by the stronger dollar or weakness in non-US economies. In either case, the data are likely to reinforce the cautious view of some Fed officials. Today's FOMC Statement is likely to repeat that "business fixed investment has been soft."
The weakness in Durables argues against a Fed rate hike in September. As such, it is a positive for both stocks and Treasuries.
Here are a few key points:
1. While the underlying Core Durable Goods Orders (Non-defense Capital Goods Excluding Civilian Aircraft) edged up 0.2% m/m, they remain below the Q216 average as well as the averages of the prior two quarters. They do not bode well for capital spending in Q316.
2. Core Durable Goods Shipments fell for the 2nd month in a row, and Durable Goods Inventories fell, too. These are inputs into Q2 GDP and work to hold down the latter. The Fed model estimates are likely to remain at 2.2-2.4% (q/q, saar). Possibly, the NY Fed's early projection of Q316 GDP could be revised down from the the 2.6% estimate.
3. To be sure, the 4.0% drop in Total Durable Goods Orders exaggerates weakness, as it was depressed by declines in volatile civilian aircraft orders (hurt by seasonal factors, as well) and defense orders.
The weakness in Durables argues against a Fed rate hike in September. As such, it is a positive for both stocks and Treasuries.
Here are a few key points:
1. While the underlying Core Durable Goods Orders (Non-defense Capital Goods Excluding Civilian Aircraft) edged up 0.2% m/m, they remain below the Q216 average as well as the averages of the prior two quarters. They do not bode well for capital spending in Q316.
2. Core Durable Goods Shipments fell for the 2nd month in a row, and Durable Goods Inventories fell, too. These are inputs into Q2 GDP and work to hold down the latter. The Fed model estimates are likely to remain at 2.2-2.4% (q/q, saar). Possibly, the NY Fed's early projection of Q316 GDP could be revised down from the the 2.6% estimate.
3. To be sure, the 4.0% drop in Total Durable Goods Orders exaggerates weakness, as it was depressed by declines in volatile civilian aircraft orders (hurt by seasonal factors, as well) and defense orders.
Monday, July 25, 2016
Caution May Prevail At This Week's FOMC Meeting -- Although US Economic Growth May Be Speeding Up
This Wednesday's FOMC Statement is unlikely to provide any definitive hint on whether a rate hike is coming in September. The US economy appears to be speeding up somewhat, but there remains questions about sustainability.
While US economic data have improved on balance and European data have not weakened as much as feared, there is probably too much uncertainty in the minds of Fed policymakers regarding fallout from Brexit for them to be confident that conditions will allow for a hike in a couple of months. The renewed drop in oil prices likely underscores that uncertainty. And, the stronger dollar is a negative in the outlook for US exports.
The post-winter speedup in the US economy, meanwhile, is modest. The Atlanta Fed and NY Fed models project 2.2-2.4% for Q216 Real GDP Growth, slightly below the 2.6% consensus estimate. The Q216 GDP report is due on Friday, with only tomorrow's Durable Goods and New Home Sales data still to be incorporated in the calculation.
Nevertheless, US economic growth appears to be speeding up into Q316 -- although there is still a question about sustainability. The NY Fed model's early projection is for 2.6% Real GDP Growth in Q316. And the ECRI Leading Index has begun to make new highs, again. While modest, these projections are above the 1.8-2.0% longer-range targets of the Fed.
a. Most of the increase in Q2 GDP is in consumption, which could be boosted in part by a temporary post-winter catch-up (but which could extend into Q3, given the cold Spring). So, some slowing in consumer spending ahead would seem to be reasonable expectation -- and making the question of sustainability of the speedup still open.
b. Some of the speedup seen for Q3 GDP Growth also could be a result of the slight Fed easing in June, when they cut their forward guidance slightly to 1.5 hikes from 2 hikes in the remainder of the year.
Despite the uncertainty about the sustainability of stronger US economic growth, upcoming US economic data are likely to continue to strengthen -- which should be a positive for stocks and a negative for Treasuries. Wednesday's data on June Durable Goods Orders may very well surprise to the upside, after they have lagged the improvement seen in the Mfg ISM. The Mfg ISM, itself, may climb further in July, based on the gain seen in the Markit US Mfg PMI, released last week. The Markit Mfg PMI correctly predicted the direction of Mfg ISM in each of the past 4 months.
While US economic data have improved on balance and European data have not weakened as much as feared, there is probably too much uncertainty in the minds of Fed policymakers regarding fallout from Brexit for them to be confident that conditions will allow for a hike in a couple of months. The renewed drop in oil prices likely underscores that uncertainty. And, the stronger dollar is a negative in the outlook for US exports.
The post-winter speedup in the US economy, meanwhile, is modest. The Atlanta Fed and NY Fed models project 2.2-2.4% for Q216 Real GDP Growth, slightly below the 2.6% consensus estimate. The Q216 GDP report is due on Friday, with only tomorrow's Durable Goods and New Home Sales data still to be incorporated in the calculation.
Nevertheless, US economic growth appears to be speeding up into Q316 -- although there is still a question about sustainability. The NY Fed model's early projection is for 2.6% Real GDP Growth in Q316. And the ECRI Leading Index has begun to make new highs, again. While modest, these projections are above the 1.8-2.0% longer-range targets of the Fed.
a. Most of the increase in Q2 GDP is in consumption, which could be boosted in part by a temporary post-winter catch-up (but which could extend into Q3, given the cold Spring). So, some slowing in consumer spending ahead would seem to be reasonable expectation -- and making the question of sustainability of the speedup still open.
b. Some of the speedup seen for Q3 GDP Growth also could be a result of the slight Fed easing in June, when they cut their forward guidance slightly to 1.5 hikes from 2 hikes in the remainder of the year.
Despite the uncertainty about the sustainability of stronger US economic growth, upcoming US economic data are likely to continue to strengthen -- which should be a positive for stocks and a negative for Treasuries. Wednesday's data on June Durable Goods Orders may very well surprise to the upside, after they have lagged the improvement seen in the Mfg ISM. The Mfg ISM, itself, may climb further in July, based on the gain seen in the Markit US Mfg PMI, released last week. The Markit Mfg PMI correctly predicted the direction of Mfg ISM in each of the past 4 months.
Friday, July 8, 2016
June Employment Report Just an Offset to May
The June Employment Report looks to be reflecting offsets to the May prints -- it should not be taken at face value. The trends seem to be consistent with moderate 2.0-2.5% Real GDP Growth in Q216.
Stocks rallied sharply in responese to the large Payroll print, but that may be because the market overreacted (on the downside) to the weakness in May. Today's rally to almost a new high in the S&P 500 could be in part an overshoot, but any pullback is likely to be modest as US economic growth is ok.
Treasuries should continue to be well bid in the face of international risks along with benign US economic growth.
Today's report should not prompt the Fed to hike rates. Uncertainties regarding fallout from Brexit and other developments should hold back the Fed at least through the November elections. The latest international risk is if Russia attempts any aggression in eastern Europe.
Here are some points about the June Employment Report:
1. The +287k Payroll jump in June clearly overstates trend job growth.
a. It is an offset to the +11k in May. The 2-month average is 149k, very close to the Q2 average of 147k.
b. The Q2 average slowed from the 196k Q1 average pace, which was too high relative to GDP growth that quarter.
2. The jobs gains could be consistent with a steady Unemployment Rate.
a. The Unemployment Rate rose to 4.9% in June from 4.7% in May. The Rate is back to the Q1 average.
3. Wage inflation was soft in June, but the trend may have picked up.
a. Average Hourly Earnings rose a slight 0.08% m/m, after a fairly strong 0.24% in May. But, the y/y stayed high at 2.6%.
Stocks rallied sharply in responese to the large Payroll print, but that may be because the market overreacted (on the downside) to the weakness in May. Today's rally to almost a new high in the S&P 500 could be in part an overshoot, but any pullback is likely to be modest as US economic growth is ok.
Treasuries should continue to be well bid in the face of international risks along with benign US economic growth.
Today's report should not prompt the Fed to hike rates. Uncertainties regarding fallout from Brexit and other developments should hold back the Fed at least through the November elections. The latest international risk is if Russia attempts any aggression in eastern Europe.
Here are some points about the June Employment Report:
1. The +287k Payroll jump in June clearly overstates trend job growth.
a. It is an offset to the +11k in May. The 2-month average is 149k, very close to the Q2 average of 147k.
b. The Q2 average slowed from the 196k Q1 average pace, which was too high relative to GDP growth that quarter.
2. The jobs gains could be consistent with a steady Unemployment Rate.
a. The Unemployment Rate rose to 4.9% in June from 4.7% in May. The Rate is back to the Q1 average.
3. Wage inflation was soft in June, but the trend may have picked up.
a. Average Hourly Earnings rose a slight 0.08% m/m, after a fairly strong 0.24% in May. But, the y/y stayed high at 2.6%.
Monday, July 4, 2016
What's Wrong With Donald Trump's Argument Re Foreign Trade/Immigration
In a speech over the weekend, Donald Trump appears to concede that restricting global trade or immigration would result in higher prices in the US. But, he argues that the undesirability of higher prices would be more than offset by the benefits from an increase in jobs to residents. While that sounds like a valid choice to consider, it may not be right in a broader, macroeconomic context. Specifically, if the higher price inflation leads to tighter Fed policy that slows economic growth, then employment may be lower than otherwise rather than higher.
The underlying idea is that the dis-inflationary impact of imports or immigration can be viewed as an exogenous factor that lowers the trade-off between unemployment and inflation: inflation is lower for any level of the unemployment rate than it would be without this impact. In other words, the Phillips Curve shifts to the left. From a policy perspective, this means that the Fed could be comfortable letting the Unemployment Rate fall to, say, 4.0% rather than 5.0% before being concerned about a pickup in inflation. So, the impact of imports or immigration could be to boost job creation by holding back the Fed. And, conversely, restricting imports or immigration could destroy jobs by pushing the Fed to tighten.
The underlying idea is that the dis-inflationary impact of imports or immigration can be viewed as an exogenous factor that lowers the trade-off between unemployment and inflation: inflation is lower for any level of the unemployment rate than it would be without this impact. In other words, the Phillips Curve shifts to the left. From a policy perspective, this means that the Fed could be comfortable letting the Unemployment Rate fall to, say, 4.0% rather than 5.0% before being concerned about a pickup in inflation. So, the impact of imports or immigration could be to boost job creation by holding back the Fed. And, conversely, restricting imports or immigration could destroy jobs by pushing the Fed to tighten.
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