Today's releases of data on Labor Costs and Price Inflation argue against a Fed hike:
1. The Q1 Employment Cost Index shows labor costs are well contained -- despite increases in the minimum wage in a number of states.
a. The ECI rose 0.6% q/q, in line with trend. The y/y fell to 1.9% from 2.0%, putting it at the lowest pace in over a year.
b. Lower commissions accounted for some of the subdued labor costs, but even excluding incentive-paid occupations the ECI rose an in-range 2.1%.
c. Note that it is not surprising that minimum wage hikes did not impact the ECI. This has been the case in the past and reflects the fact that only a very small percentage of the labor force gets the minimum wage.
2. The March Core PCE Deflator rose a modest 0.1% m/m (0.05% unrounded). Importantly, the y/y slipped to 1.6% from 1.7%, putting it further away from the Fed's 2.0% target.
Real Consumption was flattish in March (+0.04% m/m). Nevertheless, it stands 0.5% (annualized) above the Q116 average. This is not a bad take-off point for Q216 Real Consumption, and a 2.0% (q/q, annualized) pace cannot be ruled out.
Friday, April 29, 2016
Thursday, April 28, 2016
Real GDP Was Weak in Q116 -- No Significant Speedup Seen for Q216
The 0.5% (q/q, saar) Q116 Real GDP Growth was weak, and the details do not necessarily argue for a sharp speedup in Q216 GDP -- the NY Fed Model's 1.2% early projection for Q216 Real GDP does not seem unreasonable.
The Q116 GDP composition is only mildly pro-growth at best: Final Sales were up and Inventory Investment down, a positive combination. But, early evidence does not point to a significant speedup in Final Sales, while Inventory Investment was not terribly low in Q116.
1. Real Final Sales slowed to a modest 0.9% after +1.6% in Q415 -- to the slowest pace since Q115. The slowdown was widespread.
a. The only significant strength was in Residential Construction, which might have been exaggerated by the warm winter. The pattern of Housing Starts and New Home Sales since November do not suggest a similar gain in Q216, as I argued yesterday.
b. Business Equipment Spending fell in Q116, and is likely to remain soft in Q216 -- Core Durable Goods Orders -- a leading indicator of this spending -- weakened in February and March. Business Investment in Structures also fell. This probably reflected a further decline in oil drilling -- which is not likely to bounce back in Q216.
c. Consumer Spending slowed to 1.9% from 2.4% in Q415 -- to the lowest q/q pace since Q115. It is possible that Consumer Spending will be revised up when survey data on Services become available, as has often been the case since ObamaCare went into effect. But, this survey will not be available until the 2nd GDP revision.
2. Nonfarm Inventory Investment fell to $62.7 Bn from $76.0 Bn in Q415. The Q116 level is below the $93.3 Bn average of the prior 4 quarters, but Nonfarm Inventory Investment may not bounce much in Q216 without a pickup in final demand.
The inflation data in the report were slightly higher than consensus.
1. The most important was a 2.1% (q/q, saar) increase in the Core PCE Deflator. It exceeded the 1.9% consensus and was in line with the Fed's target. It remains to be seen whether this pace will continue in Q216, as there could have been start-of-year and other special factors that boosted it temporarily in Q116.
The Q116 GDP composition is only mildly pro-growth at best: Final Sales were up and Inventory Investment down, a positive combination. But, early evidence does not point to a significant speedup in Final Sales, while Inventory Investment was not terribly low in Q116.
1. Real Final Sales slowed to a modest 0.9% after +1.6% in Q415 -- to the slowest pace since Q115. The slowdown was widespread.
a. The only significant strength was in Residential Construction, which might have been exaggerated by the warm winter. The pattern of Housing Starts and New Home Sales since November do not suggest a similar gain in Q216, as I argued yesterday.
b. Business Equipment Spending fell in Q116, and is likely to remain soft in Q216 -- Core Durable Goods Orders -- a leading indicator of this spending -- weakened in February and March. Business Investment in Structures also fell. This probably reflected a further decline in oil drilling -- which is not likely to bounce back in Q216.
c. Consumer Spending slowed to 1.9% from 2.4% in Q415 -- to the lowest q/q pace since Q115. It is possible that Consumer Spending will be revised up when survey data on Services become available, as has often been the case since ObamaCare went into effect. But, this survey will not be available until the 2nd GDP revision.
2. Nonfarm Inventory Investment fell to $62.7 Bn from $76.0 Bn in Q415. The Q116 level is below the $93.3 Bn average of the prior 4 quarters, but Nonfarm Inventory Investment may not bounce much in Q216 without a pickup in final demand.
The inflation data in the report were slightly higher than consensus.
1. The most important was a 2.1% (q/q, saar) increase in the Core PCE Deflator. It exceeded the 1.9% consensus and was in line with the Fed's target. It remains to be seen whether this pace will continue in Q216, as there could have been start-of-year and other special factors that boosted it temporarily in Q116.
Wednesday, April 27, 2016
What Is Important in the April FOMC Statement
The most important change in the April FOMC Statement is the downshift in the Fed's view of US economic growth. This suggests the Fed is no hurry to hike rates.
a. April Statement: "economic activity appears to have slowed."
b. March Statement: "economic activity has been expanding at a moderate pace."
The April description of economic activity is accurate, as I have pointed out in earlier blogs. It would seem to acknowledge that the "global economic and financial developments of recent months" mentioned in the March Statement could have begun to impact the US economic activity. There could be other reasons, as well, for the slowdown in GDP Growth, so it is reasonable that the April Statement does not explicitly make a connection between global and US developments.
To be sure, the April Statement continued to mention further improvement in the labor market -- and placed it ahead of the economic slowdown comment. This placement suggests the Fed is not yet willing to throw in the towel about the possibility of further rate hikes. But, the labor market may very well soon begin to reflect the economic slowdown, as well -- as I highlighted in prior blogs. So, even this element could downshift in upcoming Statements.
a. April Statement: "economic activity appears to have slowed."
b. March Statement: "economic activity has been expanding at a moderate pace."
The April description of economic activity is accurate, as I have pointed out in earlier blogs. It would seem to acknowledge that the "global economic and financial developments of recent months" mentioned in the March Statement could have begun to impact the US economic activity. There could be other reasons, as well, for the slowdown in GDP Growth, so it is reasonable that the April Statement does not explicitly make a connection between global and US developments.
To be sure, the April Statement continued to mention further improvement in the labor market -- and placed it ahead of the economic slowdown comment. This placement suggests the Fed is not yet willing to throw in the towel about the possibility of further rate hikes. But, the labor market may very well soon begin to reflect the economic slowdown, as well -- as I highlighted in prior blogs. So, even this element could downshift in upcoming Statements.
This Week's US Economic Data So Far Mixed, But Still Point to Sluggish GDP Growth
So far, this week's US economic data have been mixed. March New New Home Sales and Durable Goods Orders were disappointing, posting declines and coming in below consensus. But, March Pending Home Sales sped up and the March Trade Deficit narrowed.
New Residential and Manufacturing Demand look to be in a flat ranges since November 2015, with March prints coming in at the low end of these ranges (see table below).
The smaller trade deficit resulted from a large drop in imports, meaning that some of the weakness in US domestic demand is hurting foreign economies rather than that of the US.
The flattening of demand in two major sectors of the US economy does not bode well for the GDP outlook. Consensus for Q1 Real GDP (due tomorrow) is 0.6% (q/q, saar) -- equal to the Atlanta Fed GDP Model estimate (which was raised from 0.3% after today's release of the advance March Trade Deficit). And, Q2 GDP Growth may not be much better. The NY Fed GDP Model's early prediction is +1.2%. Both quarters would be slower than the 1.4% in Q415.
I would not be surprised if this sluggish growth picture catches up to April Payrolls, pulling them below 200k. April Payrolls are due May 6.
This anemic growth backdrop should keep the Fed on hold at least until after the November elections. The backdrop is a positive for Treasuries and a caution for stocks.
Durable Goods Orders
New Home Sales Ex Transportation Core
Oct15 715k Units $156.8 Bn $69.6 Bn
Nov 727 156.0 68.9
Dec 732 154.9 66.5
Q4 Avg 725 155.9 68.3
Jan16 728 157.0 68.7
Feb 736 155.1 66.9
Mar 724 154.7 66.9
Q1Avg 729 155.6 67.5
New Residential and Manufacturing Demand look to be in a flat ranges since November 2015, with March prints coming in at the low end of these ranges (see table below).
The smaller trade deficit resulted from a large drop in imports, meaning that some of the weakness in US domestic demand is hurting foreign economies rather than that of the US.
The flattening of demand in two major sectors of the US economy does not bode well for the GDP outlook. Consensus for Q1 Real GDP (due tomorrow) is 0.6% (q/q, saar) -- equal to the Atlanta Fed GDP Model estimate (which was raised from 0.3% after today's release of the advance March Trade Deficit). And, Q2 GDP Growth may not be much better. The NY Fed GDP Model's early prediction is +1.2%. Both quarters would be slower than the 1.4% in Q415.
I would not be surprised if this sluggish growth picture catches up to April Payrolls, pulling them below 200k. April Payrolls are due May 6.
This anemic growth backdrop should keep the Fed on hold at least until after the November elections. The backdrop is a positive for Treasuries and a caution for stocks.
Durable Goods Orders
New Home Sales Ex Transportation Core
Oct15 715k Units $156.8 Bn $69.6 Bn
Nov 727 156.0 68.9
Dec 732 154.9 66.5
Q4 Avg 725 155.9 68.3
Jan16 728 157.0 68.7
Feb 736 155.1 66.9
Mar 724 154.7 66.9
Q1Avg 729 155.6 67.5
Sunday, April 24, 2016
US Economic Data and the Markets Over the Next Two Weeks
Here are some broad-based thoughts on US economic data and the stock and Treasury markets over the next two weeks. The data should be bullish stocks and bearish Treasuries through Wednesday and then reverse on Thursday. The data risk surprising on the softer side in the following week.
Next Week
Stronger US economic data are likely to dominate through Wednesday in the coming week. While they are minor or volatile, they should support stocks and weigh on Treasuries into Wednesday's FOMC Meeting. The FOMC Statement should differ little from the March Statement, which looks to cover the downside global risks previously highlighted by Yellen. Stocks and Treasuries nevertheless risk reversing to some extent their movements on Thursday when softer US economic data are expected -- Q1 Real GDP and Initial Claims. Also, the stock market tends to reverse the d/d direction the day after an FOMC meeting. Month-end buying would work against such a pullback in stocks or, at the minimum, mitigate it, however.
First Week of May
US economic data could surprise on the softer side, which would help Treasuries.
1. At this point, early evidence suggests a dip in the April Mfg ISM.
2. A slowdown in April Payrolls to under 200k m/m cannot be ruled out -- it being a lagged response to the Q1 GDP slowdown. While the Claims data strengthened in April, they are not reliable predictors of speedups/slowdowns in Payrolls.
Next Week
Stronger US economic data are likely to dominate through Wednesday in the coming week. While they are minor or volatile, they should support stocks and weigh on Treasuries into Wednesday's FOMC Meeting. The FOMC Statement should differ little from the March Statement, which looks to cover the downside global risks previously highlighted by Yellen. Stocks and Treasuries nevertheless risk reversing to some extent their movements on Thursday when softer US economic data are expected -- Q1 Real GDP and Initial Claims. Also, the stock market tends to reverse the d/d direction the day after an FOMC meeting. Month-end buying would work against such a pullback in stocks or, at the minimum, mitigate it, however.
First Week of May
US economic data could surprise on the softer side, which would help Treasuries.
1. At this point, early evidence suggests a dip in the April Mfg ISM.
2. A slowdown in April Payrolls to under 200k m/m cannot be ruled out -- it being a lagged response to the Q1 GDP slowdown. While the Claims data strengthened in April, they are not reliable predictors of speedups/slowdowns in Payrolls.
Thursday, April 21, 2016
US Economic Data Divergning
US economic data have diverged in March and early April, adding up to the likelihood of only a modest pickup in GDP Growth in Q216. The high-productivity sectors -- Manufacturing and Construction -- are mixed, while the low-productivity sector -- Services -- is strong. The strength of the low-productivity sector should boost the demand for labor, which could put some upward pressure on wage inflation. But, the attendant shift in the composition of jobs -- toward lower-paying jobs -- should work to hold down measures of wage inflation. Overall, the divergence among the sectors of the US economy should keep the Fed on hold.
The divergence showed up in the March Payrolls, where Construction and Services jobs posted strong gains while Manufacturing and Mining jobs fell.
The weakness in Manufacturing Jobs translated into a dip in March Manufacturing Output (contained in Industrial Production). This weakness apparently was picked up in today's decline in the April Phil Fed Mfg Index, as well.
a. The decline in the Phil Fed Index raises downside risk for the April Mfg ISM. The two moved in the same direction in 6 of the past 9 months.
Meanwhile, housing-related data were mixed so far in March, with Starts down but Existing Home Sales up. The decline in Housing Starts was likely payback for the boost from warm weather in January and February. Starts should rebound in April, but they may not take back all of the March drop. But, the trend is up, as demand remains strong -- which is expected to be seen in March New Home Sales, due Monday.
The +199k mm jump in March Private Services Jobs accounted for more than the +195k increase in Private Payrolls. And, demand for Services Jobs could be behind the further decline in Initial and Continuing Claims last week.
The divergence showed up in the March Payrolls, where Construction and Services jobs posted strong gains while Manufacturing and Mining jobs fell.
The weakness in Manufacturing Jobs translated into a dip in March Manufacturing Output (contained in Industrial Production). This weakness apparently was picked up in today's decline in the April Phil Fed Mfg Index, as well.
a. The decline in the Phil Fed Index raises downside risk for the April Mfg ISM. The two moved in the same direction in 6 of the past 9 months.
Meanwhile, housing-related data were mixed so far in March, with Starts down but Existing Home Sales up. The decline in Housing Starts was likely payback for the boost from warm weather in January and February. Starts should rebound in April, but they may not take back all of the March drop. But, the trend is up, as demand remains strong -- which is expected to be seen in March New Home Sales, due Monday.
The +199k mm jump in March Private Services Jobs accounted for more than the +195k increase in Private Payrolls. And, demand for Services Jobs could be behind the further decline in Initial and Continuing Claims last week.
Tuesday, April 19, 2016
Drop in March Housing Starts/Permits Likely an Aberration
The drop in March Housing Starts/Permits cannot be attributed to just the volatile Multi-Family component, as 1-Family Starts/Permits fell, as well. Nevertheless, the drop looks to be an aberration, and the risk is for a rebound in Starts in April:
1. The 7.7% m/m decline in Permits (both Total and 1-Family) was not as large as the 8.8% decline in Starts. This relatively better performance of Permits points suggests the drop in Starts was overdone relative to plans, possibly due to bad weather. (1-Family Permits rose in the Midwest and West.) The spread between Permits and Starts points to a rebound in Starts in April.
2. The drop in Starts and Permits could have been payback for the boost they got in January and February from the relatively warm weather. If so, the March levels understate the underlying trend.
3. Evidence that residential construction activity was in an uptrend in March is in the March Employment Report. Construction jobs continued to climb that month, both for residential and non-residential activity.
1. The 7.7% m/m decline in Permits (both Total and 1-Family) was not as large as the 8.8% decline in Starts. This relatively better performance of Permits points suggests the drop in Starts was overdone relative to plans, possibly due to bad weather. (1-Family Permits rose in the Midwest and West.) The spread between Permits and Starts points to a rebound in Starts in April.
2. The drop in Starts and Permits could have been payback for the boost they got in January and February from the relatively warm weather. If so, the March levels understate the underlying trend.
3. Evidence that residential construction activity was in an uptrend in March is in the March Employment Report. Construction jobs continued to climb that month, both for residential and non-residential activity.
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