The Fed does not have to change its FOMC Statement by much on Wednesday to accommodate the strong Q119 Real GDP and March Payroll prints with its "patient" approach to monetary policy. All the Statement needs is to drop "growth of economic activity has slowed from its solid rate in the fourth quarter. Payroll employment was little changed in February,...." and indicate that growth was strong and job gains were solid on average in Q119. It can keep its justification for steady policy, saying "In light of global economic and financial developments and muted inflation pressures, the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support these outcomes." The financial developments could refer to the flat Treasury yield curve, so still could be referenced despite the stock market rally.
The Fed still has a problem, though, but does not have to face it until June. It had lowered its 2019 GDP Central Tendency forecast in March to 1.9-2.2%. Assuming the advance print of 3.2% for Q119 Real GDP Growth holds through revisions, Real GDP Growth would have to slow to 1.9% on average over the next 3 quarters to hit the upper end of this forecast. There is little reason to think this will be case, despite the attempt by some Street economists to dismiss Q119 GDP strength to temporary factors. Early evidence points to speedups in Consumer Spending and Business Equipment Spending, so another 3+% quarter cannot be ruled out.
Even if the Fed raises its Real GDP forecast at the June FOMC Meeting, there is a chance it could lower its inflation forecast. The y/y for the Core PCE Deflator was 1.8% in January. It should fall to about 1.6% by March, based on the CPI and the Q119 Core PCE Deflator print -- well below the Fed's 2.0% target. By lowering its inflation forecast, the Fed could justify maintaining its steady monetary policy.
This week's April Employment Report will likely underscore the dichotomy between strong growth and low inflation. The Claims data suggest a 200k+ Payroll gain and a decline in the Unemployment Rate from 3.8%. But, calendar considerations argue for a modest 0.1-0.2% m/m Hourly Earnings. Consensus is +173k Payrolls, 3.8% Unemployment Rate and 0.3% AHE. Note that the most interesting part of Payrolls in this report will be whether manufacturing and construction jobs speed up. These two sectors have lagged the overall economy recently. A speedup in their job growth would bode well for a strong Q219 GDP gain.
Other US economic data this week risk being soft. The April Mfg ISM should decline, based on most regional manufacturing surveys. Consensus looks for a dip to 55.0 from 55.3 in March. The March Core PCE Deflator should be 0.0-0.1% m/m, as opposed to the 0.2% consensus estimate, based on the low CPI. The Q119 Employment Cost Index risks coming in below the consensus estimate of a steady 0.7% q/q, since Average Hourly Earnings slowed in Q119 from its Q418 pace.
Sunday, April 28, 2019
Friday, April 26, 2019
The Strong Q119 Real GDP Print Should Not Be Dismissed
The strong 3.2% (q/q, saar) Q119 Real GDP Growth should not be dismissed as temporary. It will make the Fed more cautious about its "patient" policy, as the economy's strength will likely force officials to raise their GDP forecast for the year. Strong Employment Reports and a speedup in core inflation measures in the next few months could bring Fed tightening risks back into the markets.
1. While Private Final Demand was soft -- hurt by bad weather, government shutdown and trade war -- early evidence points to a speedup in Q219.
a. In particular, March Retail Sales sets the stage for a speedup in Consumer Spending.
b. The jump in March Core Durable Goods Orders should translate into a speedup in Equipment Spending in Q219.
c. The jump in March New Home Sales bodes well for residential construction as the weather improves in the Spring.
2. Nonfarm Inventory Investment was high for the second quarter in a row. While the conventional view is that high inventory investment is a negative for the next quarter's growth, this is not necessarily the case. Inventory investment generates income, which fuels consumption ahead.
3. Export strength is ironic, given all the attention on slow global growth.
4. Government Purchases, both Federal and State & Local, continued to climb notably.
5. While Motor Vehicle Output dropped 5.0% (q/q, saar), it subtracted only 0.2% pt from GDP Growth.
The GDP strength shows that the weakening in manufacturing surveys is just a small part of the overall economy story.
The low inflation prints during the quarter showed up in soft GDP and PCE Deflators. The y/y for the Core PCE Deflator fell to 1.7% (y/y) after being 1.9-2.0% in the prior 3 quarters.
1. While Private Final Demand was soft -- hurt by bad weather, government shutdown and trade war -- early evidence points to a speedup in Q219.
a. In particular, March Retail Sales sets the stage for a speedup in Consumer Spending.
b. The jump in March Core Durable Goods Orders should translate into a speedup in Equipment Spending in Q219.
c. The jump in March New Home Sales bodes well for residential construction as the weather improves in the Spring.
2. Nonfarm Inventory Investment was high for the second quarter in a row. While the conventional view is that high inventory investment is a negative for the next quarter's growth, this is not necessarily the case. Inventory investment generates income, which fuels consumption ahead.
3. Export strength is ironic, given all the attention on slow global growth.
4. Government Purchases, both Federal and State & Local, continued to climb notably.
5. While Motor Vehicle Output dropped 5.0% (q/q, saar), it subtracted only 0.2% pt from GDP Growth.
The GDP strength shows that the weakening in manufacturing surveys is just a small part of the overall economy story.
The low inflation prints during the quarter showed up in soft GDP and PCE Deflators. The y/y for the Core PCE Deflator fell to 1.7% (y/y) after being 1.9-2.0% in the prior 3 quarters.
Sunday, April 21, 2019
Q119 Real GDP and the Market Narrative
This week's release of Q119 Real GDP could undermine the market narrative of a US economic slowdown. A print close to the Atlanta Fed model's 2.8% projection would be well above the 1.8% consensus. It could precipitate another ratcheting up of longer-term Treasury yields -- although they seem to be more related to German yields than US economic data at the moment. To be sure, there are a few more data points ahead of the release that could impact the GDP estimates -- Existing and New Home Sales and Durable Goods Shipments.
One of the factors presumably behind the market narrative is the bad winter weather. But, historically, there is no consistent relationship between bad winter weather and weak Q1 GDP Growth. While January and February activity tends to be impacted by the weather, a recovery often begins in March, thus salvaging the quarterly average.
A March recovery this year so far has been evident in Retail Sales and Payrolls. But, manufacturing output and residential construction are still lagging. Some of the manufacturing weakness is in the motor vehicle sector, which appears to be going through an inventory correction. Bad weather could have weighed on Housing Starts in March. With mortgage rates down and Purchase Component of Mortgage Applications up, the housing sector may be poised to snap back this Spring.
Perhaps the most important near-term evidence regarding manufacturing and housing will be whether job growth in these sectors bounces in the April Employment Report, due May 3. So far, the Claims data suggest a strong overall jobs gain, although the relationship between Claims and Payrolls as well as between Claims and the Unemployment Rate are not exact.
Change Between Payroll Survey Weeks m/m change
4-Week Avg Continuing Claims Payrolls Unemployment
of Initial Claims Rate
Jan 19 -2k +5k 312k +0.1% pt
Feb +15 +93 33 -0.2
Mar -12 -50 196 0.0
Apr -24 -103 *
* Change from March Survey Week to Week Before April Survey Week.
One of the factors presumably behind the market narrative is the bad winter weather. But, historically, there is no consistent relationship between bad winter weather and weak Q1 GDP Growth. While January and February activity tends to be impacted by the weather, a recovery often begins in March, thus salvaging the quarterly average.
A March recovery this year so far has been evident in Retail Sales and Payrolls. But, manufacturing output and residential construction are still lagging. Some of the manufacturing weakness is in the motor vehicle sector, which appears to be going through an inventory correction. Bad weather could have weighed on Housing Starts in March. With mortgage rates down and Purchase Component of Mortgage Applications up, the housing sector may be poised to snap back this Spring.
Perhaps the most important near-term evidence regarding manufacturing and housing will be whether job growth in these sectors bounces in the April Employment Report, due May 3. So far, the Claims data suggest a strong overall jobs gain, although the relationship between Claims and Payrolls as well as between Claims and the Unemployment Rate are not exact.
Change Between Payroll Survey Weeks m/m change
4-Week Avg Continuing Claims Payrolls Unemployment
of Initial Claims Rate
Jan 19 -2k +5k 312k +0.1% pt
Feb +15 +93 33 -0.2
Mar -12 -50 196 0.0
Apr -24 -103 *
* Change from March Survey Week to Week Before April Survey Week.
Sunday, April 14, 2019
Will the Slowdown in Underlying Inflation Continue?
The slowdown in underlying inflation may soon be over, but a sharp reversal is unlikely. Oil prices have turned up, while the decline in underlying import prices may be ending. Base effects make a further decline in the y/y for the Core CPI and Core PPI Excluding Trade Services difficult to achieve in the next report. And, evidence is accumulating pointing to a speedup in economic growth in Q219. There are reasons to think, though, that the next round of evidence on labor costs will remain benign.
The underlying measures of the CPI and PPI both have slowed (see table below). Both are down to 2.0% on a y/y basis in March. The Core PPI Excluding Trade Services began its slowdown earlier, in Q418. Arguably, the PPI leads the CPI, and is not yet pointing to a speedup. Nevertheless, it will be difficult for both to slow further in April. The March slowdown in the Core CPI resulted largely from a drop in apparel prices that will not likely be repeated to the same extent in April (although they still could decline due to bi-monthly sampling and the late Easter). Base effects work against a further decline in the y/y for both the Core CPI and Core PPI Ex Trade Services. Each has to rise by less than 0.1% m/m to lower its y/y in April.
Import Prices Excluding Food and Fuel (oil and natural gas) should become less of a drag on US domestic inflation ahead. They started to slow in Q318, falling below last year's level beginning in January 2019. Much of the weakening came from China, where companies apparently cut prices to offset the impact of tariffs. However, prices of imports from China turned up m/m slightly in March, which could mean the bulk of the weakening in import prices is behind us if not coming to an end. While a stronger dollar likely played a role in import price weakening, it has stabilized and, in particular, has come off its highs versus the Chinese yuan. (Tariffs are not included in the Import Price data). To be sure, global economic softness could exert further downward pressure on prices. And, relatively faster US economic growth and possibly tariffs against the EU (as threatened by Trump) would likely lift the dollar ahead. So, import prices are not likely to reverse sharply, if at all.
Oil prices affect the underlying measures of inflation to the extent they are passed through to prices of other goods and services. Airfare fares, for example, tend to be impacted by swings in oil prices. The latest run-up in oil prices still has not been enough to put them above their levels in April 2018, however. So, the y/y looks like it should remain negative this month, perhaps to about -6.0%.
Labor Costs are benign. The broadest measures -- Compensation/Hour and Unit Labor Costs (Compensation/Hour adjusted for Productivity) -- have slowed. Compensation/Hour Growth was down to 2.8% (Q4/Q4) in 2018 from 3.2% in 2017. Productivity sped up to 1.8% from 1.0%. So Unit Labor Costs slowed to 1.0% from 2.2%. Base effects tilt the odds towards a further slowdown in ULC in Q119. Although Average Hourly Earnings sped up since September 2018, this is a narrow measure of labor costs. Note that calendar considerations suggest a 0.1% m/m print for April AHE. This would lower the y/y to 3.1%.
(y/y percent change)
Core CPI Core PPI Import Avg Hrly Unit Oil Ex Trade Prices Earnings Labor Prices
Services Ex Food, Costs
Fuels
Dec 17 1.8 2.3 1.4 2.7 2.2 11.4
Mar 18 2.1 2.9 1.8 2.8 2.0 27.1
Jun 2.3 2.7 1.8 2.9 1.4 50.2
Sep 2.2 3.1 1.0 3.0 1.1 41.0
Dec 2.2 2.8 0.6 3.3 1.0 -14.4
Jan 19 2.2 2.5 -0.1 3.2 -19.3
Feb 2.1 2.3 -0.3 3.4 -11.7
Mar 2.0 2.0 -0.7 3.2 na -7.3
The underlying measures of the CPI and PPI both have slowed (see table below). Both are down to 2.0% on a y/y basis in March. The Core PPI Excluding Trade Services began its slowdown earlier, in Q418. Arguably, the PPI leads the CPI, and is not yet pointing to a speedup. Nevertheless, it will be difficult for both to slow further in April. The March slowdown in the Core CPI resulted largely from a drop in apparel prices that will not likely be repeated to the same extent in April (although they still could decline due to bi-monthly sampling and the late Easter). Base effects work against a further decline in the y/y for both the Core CPI and Core PPI Ex Trade Services. Each has to rise by less than 0.1% m/m to lower its y/y in April.
Import Prices Excluding Food and Fuel (oil and natural gas) should become less of a drag on US domestic inflation ahead. They started to slow in Q318, falling below last year's level beginning in January 2019. Much of the weakening came from China, where companies apparently cut prices to offset the impact of tariffs. However, prices of imports from China turned up m/m slightly in March, which could mean the bulk of the weakening in import prices is behind us if not coming to an end. While a stronger dollar likely played a role in import price weakening, it has stabilized and, in particular, has come off its highs versus the Chinese yuan. (Tariffs are not included in the Import Price data). To be sure, global economic softness could exert further downward pressure on prices. And, relatively faster US economic growth and possibly tariffs against the EU (as threatened by Trump) would likely lift the dollar ahead. So, import prices are not likely to reverse sharply, if at all.
Oil prices affect the underlying measures of inflation to the extent they are passed through to prices of other goods and services. Airfare fares, for example, tend to be impacted by swings in oil prices. The latest run-up in oil prices still has not been enough to put them above their levels in April 2018, however. So, the y/y looks like it should remain negative this month, perhaps to about -6.0%.
Labor Costs are benign. The broadest measures -- Compensation/Hour and Unit Labor Costs (Compensation/Hour adjusted for Productivity) -- have slowed. Compensation/Hour Growth was down to 2.8% (Q4/Q4) in 2018 from 3.2% in 2017. Productivity sped up to 1.8% from 1.0%. So Unit Labor Costs slowed to 1.0% from 2.2%. Base effects tilt the odds towards a further slowdown in ULC in Q119. Although Average Hourly Earnings sped up since September 2018, this is a narrow measure of labor costs. Note that calendar considerations suggest a 0.1% m/m print for April AHE. This would lower the y/y to 3.1%.
(y/y percent change)
Core CPI Core PPI Import Avg Hrly Unit Oil Ex Trade Prices Earnings Labor Prices
Services Ex Food, Costs
Fuels
Dec 17 1.8 2.3 1.4 2.7 2.2 11.4
Mar 18 2.1 2.9 1.8 2.8 2.0 27.1
Jun 2.3 2.7 1.8 2.9 1.4 50.2
Sep 2.2 3.1 1.0 3.0 1.1 41.0
Dec 2.2 2.8 0.6 3.3 1.0 -14.4
Jan 19 2.2 2.5 -0.1 3.2 -19.3
Feb 2.1 2.3 -0.3 3.4 -11.7
Mar 2.0 2.0 -0.7 3.2 na -7.3
Sunday, April 7, 2019
Corporate Earnings, Inflation and the Fed
The markets will face the start of Q119 corporate earnings releases, as well as the March FOMC Minutes and Fedspeak this week. Among the US economic data scheduled for release, the March CPI is probably the most important. In the background is expanding evidence that economic growth has begun to pick up.
The Q119 corporate earnings season is not likely to undermine this year's stock market rally, although individual company stocks could be pummeled by disappointing results. Consensus expectations of a y/y decline in Q119 earnings are well known. But, earnings have tended to come in above estimates in the recent past. Companies' forward guidance will be important, but they are not likely to be bad, given signs the overall economy is beginning to perk up.
Consensus looks for a benign 0.2% m/m March Core CPI, keeping the y/y steady at 2.1%. There could be some upside risk on balance, however. Drug and medical services prices could rise after they dropped 1.0% m/m and were flat, respectively, in February. And, some of the recent bounce in oil prices may be passed through. But, vehicle prices may have been cut further, given the jump in motor vehicle sales that month. And, apparel prices could be a wild card, given the difficulty of seasonally adjusting the transition to Spring clothing.
Fedspeak, with Powell and Clarida scheduled to make speeches, as well as the FOMC Minutes should reinforce the Fed's intention to stay patient and wait to see if growth and inflation speed up. They will not likely hint that the Fed will pull forward ending long-term asset sales from "later in the year." An H219 timing of this policy is already built into the markets.
There has been some concern in the press regarding the two people Trump either has nominated or intends to nominate to be Governors of the Federal Reserve Board -- Stephen Moore and Herman Cain. Putting aside their personal attributes or deficiencies, their impact on Fed credibility will probably be insignificant. Monetary policy is conducted by 12-member Federal Open Market Committee -- the 7 Governors, NY Fed President and 4 of the other 11 Federal Reserve District Presidents. The latter 4 rotate each year. The Chair (currently Powell) builds a consensus among the other members of the FOMC in deciding policy and has considerable influence on the final decision. While there can be dissents, two votes will not dominate the full vote.
And, without commenting on Moore's or Cain's qualifications, I would note that two of the recent Fed Chairs -- Greenspan and Bernanke, both of whom were considered highly qualified to lead the Fed -- made major mistakes on the job. The current Chair, Powell, probably made a mistake, as well, tightening in December. So, I am cautious about judging whether the candidates' qualifications suggest one way or the other that they will be successful Fed Governors.
The Q119 corporate earnings season is not likely to undermine this year's stock market rally, although individual company stocks could be pummeled by disappointing results. Consensus expectations of a y/y decline in Q119 earnings are well known. But, earnings have tended to come in above estimates in the recent past. Companies' forward guidance will be important, but they are not likely to be bad, given signs the overall economy is beginning to perk up.
Consensus looks for a benign 0.2% m/m March Core CPI, keeping the y/y steady at 2.1%. There could be some upside risk on balance, however. Drug and medical services prices could rise after they dropped 1.0% m/m and were flat, respectively, in February. And, some of the recent bounce in oil prices may be passed through. But, vehicle prices may have been cut further, given the jump in motor vehicle sales that month. And, apparel prices could be a wild card, given the difficulty of seasonally adjusting the transition to Spring clothing.
Fedspeak, with Powell and Clarida scheduled to make speeches, as well as the FOMC Minutes should reinforce the Fed's intention to stay patient and wait to see if growth and inflation speed up. They will not likely hint that the Fed will pull forward ending long-term asset sales from "later in the year." An H219 timing of this policy is already built into the markets.
There has been some concern in the press regarding the two people Trump either has nominated or intends to nominate to be Governors of the Federal Reserve Board -- Stephen Moore and Herman Cain. Putting aside their personal attributes or deficiencies, their impact on Fed credibility will probably be insignificant. Monetary policy is conducted by 12-member Federal Open Market Committee -- the 7 Governors, NY Fed President and 4 of the other 11 Federal Reserve District Presidents. The latter 4 rotate each year. The Chair (currently Powell) builds a consensus among the other members of the FOMC in deciding policy and has considerable influence on the final decision. While there can be dissents, two votes will not dominate the full vote.
And, without commenting on Moore's or Cain's qualifications, I would note that two of the recent Fed Chairs -- Greenspan and Bernanke, both of whom were considered highly qualified to lead the Fed -- made major mistakes on the job. The current Chair, Powell, probably made a mistake, as well, tightening in December. So, I am cautious about judging whether the candidates' qualifications suggest one way or the other that they will be successful Fed Governors.
Friday, April 5, 2019
March Employment Report Points to Speedup, But Extent Not Clear
The March Employment Report adds to evidence that economic growth will speed up in Q219. There is still question about the extent of the speedup. The Report should not shift the Fed from its "patient" waiting.
The clearest evidence of a speedup is in Total Hours Worked. They jumped as a result of the bounceback in Payrolls and Average Workweek. They stand 0.8% (annualized) above the Q119 average, representing a moderate take-off point for Q219. If they increase m/m near trend over the quarter, their Q219 average would have risen 2.5% (q/q, saar). Adding productivity growth, this would point to 3.0-3.5% Q219 Real GDP Growth.
However, the relatively high-productivity sectors -- manufacturing, construction and mining -- did not bounce back strongly in March. Jobs fell in manufacturing and did not fully recover from the February decline in the other two. Either bad weather or the drag from tighter monetary policy/trade war continued to weigh on these sectors. If weather was to blame, then there could be a large snapback in Q219. But, if the more fundamental factors remained in play, some drag could persist into the Spring. Surveys of manufacturers and housing-related data are important to watch in the next couple of months.
While Payrolls bounced back from February, the pace remained subdued. At +196k, the m/m gain was only slightly above the +180k Q119 average and remained below the +223k 2018 m/m average. The steady 3.8% Unemployment Rate resulted in an uptick in the Q119 average Unemployment Rate to 3.9% from 3.8% in Q418, confirming a softening in the labor market in Q119.
Wage inflation pulled back to 0.1% m/m from the high 0.4% in February. While calendar considerations pointed to 0.3% m/m in both months, composition shifts in Payrolls likely were responsible for the m/m swings. The y/y fell to 3.2% from 3.4%, but is still slightly on the high side.
The clearest evidence of a speedup is in Total Hours Worked. They jumped as a result of the bounceback in Payrolls and Average Workweek. They stand 0.8% (annualized) above the Q119 average, representing a moderate take-off point for Q219. If they increase m/m near trend over the quarter, their Q219 average would have risen 2.5% (q/q, saar). Adding productivity growth, this would point to 3.0-3.5% Q219 Real GDP Growth.
However, the relatively high-productivity sectors -- manufacturing, construction and mining -- did not bounce back strongly in March. Jobs fell in manufacturing and did not fully recover from the February decline in the other two. Either bad weather or the drag from tighter monetary policy/trade war continued to weigh on these sectors. If weather was to blame, then there could be a large snapback in Q219. But, if the more fundamental factors remained in play, some drag could persist into the Spring. Surveys of manufacturers and housing-related data are important to watch in the next couple of months.
While Payrolls bounced back from February, the pace remained subdued. At +196k, the m/m gain was only slightly above the +180k Q119 average and remained below the +223k 2018 m/m average. The steady 3.8% Unemployment Rate resulted in an uptick in the Q119 average Unemployment Rate to 3.9% from 3.8% in Q418, confirming a softening in the labor market in Q119.
Wage inflation pulled back to 0.1% m/m from the high 0.4% in February. While calendar considerations pointed to 0.3% m/m in both months, composition shifts in Payrolls likely were responsible for the m/m swings. The y/y fell to 3.2% from 3.4%, but is still slightly on the high side.
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