- The Federal Reserve’s highly accommodative monetary policy, improving real estate conditions, and an improved appetite for automobiles are all pushing on the U.S. economy. Fiscal tightening and cool global demand are pulling on the U.S. economy. The ramp-up of the Affordable Healthcare Act through this year is an added drag on small business hiring. The push and the pull will be felt for the remainder of this year. Buffeted by these opposing forces, U.S. GDP growth is set for an unspectacular ride through 2013, averaging near 2.0 percent for the year.
- Real GDP in the U.S. grew at a 2.5 percent annualized rate in the first quarter of this year according to the advance estimate. We are likely to see an upward revision to closer to 2.8 percent growth when the second estimate is released on May 30. Inventory accumulation played a big role in 2013Q1 GDP, adding just over 1 percent to the headline growth rate. The Q1 inventory boost was an artifact of Hurricane Sandy, which caused an inventory drawdown in the fourth quarter of last year as production was stalled in the Northeast. Government spending subtracted 0.8 percentage points from Q1 growth largely due to reduced federal spending.
- In the current second quarter real GDP growth is expected to cool to between 2.0 and 2.5 percent, with less inventory accumulation than we saw in Q1. In Q3 we have another step‐down in growth to between 1.5 and 2.0 percent. In the third quarter inventory rebuilding will be complete and output will dial down accordingly. The drag from fiscal tightening will intensify.
- With the cooler growth expected in both Q2 and Q3, the Federal Reserve will keep QE3 engaged at the current rate through mid‐summer, and likely longer. The Fed is focused on labor market conditions. Job growth north of 180,000 jobs per month in the third quarter increases the likelihood the QE3 is gradually dialed back through the fourth quarter of this year and into early 2014. Weak job gains through the third quarter would increase the odds that QE3 rolls through the remainder of 2013, to be dialed down through the first half of 2014.
- Retail sales for April registered a stronger‐than‐expected 0.1 percent nominal gain, which would look like a 0.3 percent gain after accounting for energy price declines. Retail sales of motor vehicles and parts increased by 1.0 percent in April, however, the unit auto sales figures are flat so far this year. Consumers are feeling the push and the pull. Tax hikes and spending cuts hurt, but strong home equity growth is a very broad support to U.S. households.
Click here for the complete May 2013 U.S. Economic Update.
Lots of data this week…not much next week. Unemployment insurance claims and chain‐store sales, both due out Thursday, will be the most watched economic numbers for the week ahead.
The April jobs report came in stronger than feared as the economy added a moderate 165,000 jobs and the unemployment rate fell to 7.5 percent. The report laid to rest fears of a weak jobs number, stirred up by other soft data released earlier this week. In addition to being good in April, by not being terrible, the jobs report showed strong positive revisions to February and March. The unemployment rate came down a tenth in April, for the right reasons, to 7.5 percent.
The ISM Non‐Manufacturing Index dipped in April to 53.1, from March’s 54.4. The U.S. international trade gap narrowed unexpectedly in March to $38.8 billion. What makes this noteworthy is that the advanced estimate of first quarter real GDP growth, at 2.5 percent, will be revised up, to about 2.8 percent if other components of GDP remain unchanged. Imports were soft in March, down $6.4 billion as oil prices eased. Exports
were down $1.7 billion for the month.
The ISM Manufacturing Index dipped to a still-positive 50.7 for April. Construction spending for March declined by 1.7 percent as total publicly funded construction declined by 4.1 percent. Consumer confidence increased sharply in April. House prices continue to firm up. The Case‐Shiller 20‐City composite index increased by 1.2 percent from January to February. The index is now up 9.3 percent from a year ago. The Dallas Fed’s Texas Manufacturing Index fell from a positive 9.9 to a near‐neutral ‐0.5 in April. The Chicago Purchasing Managers Index fell to 49.0 for April, indicating deteriorating regional manufacturing conditions.
Income and spending data for March show modest gains. But for the first quarter as a whole, real disposable personal income (after inflation and taxes) showed the biggest quarterly drop since the Great Recession. Real disposable personal income contracted at
a 5.3 percent annualized rate in Q1 due primarily to the drag from the payroll tax increase that took effect in early January. Despite the drag on spendable dollars,
real consumer spending for the first quarter increased at a solid 3.2 percent annual rate. The personal saving rate has taken a step down as households try to maintain consumption while paying higher taxes. The saving rate for February and March was 2.7 percent, well below the near 3.5 percent saving rate we saw for much of last year. Auto sales fell in April to a 14.9 million unit rate.
Chart of the Week
Bullet Dodged as Payrolls Gain, Upward Revisions Help
- The April Payroll Employment Survey showed a moderate gain of 165,000 jobs, with positive revisions.
- The Unemployment Rate for February decreased to 7.5 percent, as the household survey gained 293K.
- Average Weekly Hours ticked down for the month to 34.4. Hourly earnings were up 0.2 percent.
- The ISM Non‐Manufacturing Index dipped to a still‐positive 53.1 in April.
- The U.S. International Trade Gap narrowed to ‐$38.8 billion in March, pointing to stronger Q1 GDP.
The April jobs report came in stronger than feared as the economy added a moderate 165,000 jobs and the unemployment rate fell to 7.5 percent. The report laid to rest fears of a weak jobs number, stirred up by other soft data released earlier this week. In addition to being good in April, by not being terrible, the jobs report showed strong positive revisions to February and March. Previously, the February data showed a strong +268,000 jobs for the month, now it shows a very strong +332,000 jobs, the best one‐month gain since May 2010. Likewise, March payrolls were revised up from a weak +88,000 to a so‐so +138,000. The unemployment rate came down a tenth in April, for the right reasons, to 7.5 percent, as the household survey showed a strong gain of 290,000 jobs. Key question…Does this report increase the odds that the Fed unwinds early from QE3? Probably not. It is a positive jobs report compared to the whisper fears. However, +165,000 jobs for April is still not a huge number, and the unemployment rate remains a full percentage point above the Fed’s 6.5 percent threshold. The Fed most likely stays the course with QE3 until a late summer re‐evaluation. If data is strong in August/September, then the unwind from QE3 begins in the fourth quarter of this year. If data is weak in the third quarter, then QE3 rolls into at least early 2014. By late summer, Chairman Bernanke will want to position Fed policy for a smooth transition to new leadership after he (perhaps) steps down in January 2014. Government employment continued to slide in April as federal government ex‐postal workers declined by 4,900. Sequestration will not only keep federal payrolls muted, but w ill also be a drag on hours worked.
The ISM Non‐Manufacturing Index dipped in April to 53.1, from March’s 54.4. The employment sub‐index remained positive at 52.0. The U.S. international trade gap narrowed unexpectedly in March to $38.8 billion. What makes this noteworthy is that the advanced estimate of first quarter real GDP growth, at 2.5 percent, will be revised up, to about 2.8 percent if other components of GDP remain unchanged. Imports were soft in
March, down $6.4 billion as oil prices eased. Exports were down $1.7 billion for the month.
Market Reaction: U.S. equity markets were boosted by the better‐than‐expected jobs report. Treasury bond yields are up. NYMEX crude is up to $95.25/barrel. The dollar is up versus the yen and down against the euro.
FOMC Stays the Course, QE3 Sails On, Other News Mixed
- QE3 will continue as originally defined with a total of $85 billion of asset purchases per month.
- The FOMC is prepared to change the pace of purchases as conditions change.
- The near‐zero fed funds rate remains linked to an unemployment rate threshold of 6.5 percent.
- The FOMC will continue to tolerate inflation expectations of up to 2.5 percent.
- The policy announcement states that “fiscal policy is restraining growth”.
In today’s monetary policy announcement the Federal Open Market Committee released a statement that is nearly identical to the one released on March 20. QE3 will remain on course, as originally defined, at a pace of $40 billion worth of MBS and $45 billion worth of Treasury bond purchases per month. The fed funds rate will stay near zero as long as the unemployment rate remains above a 6.5 percent threshold. There are only two key modifications to the Fed’s language in today’s statement. First, the FOMC states unequivocally that “fiscal policy is restraining growth”. Second, the committee states that they are prepared to increase or decre ase the size of asset purchases as economic conditions change. No real news there.
So for now, QE3 keeps sailing and the funds rate stays near zero. The FOMC reaches a key decision point in late summer when Chairman Bernanke will position monetary policy for a smooth transition in leadership to his successor, who may end up being Janet Yellen. Late summer (third quarter) is also the time when federallevel fiscal drag will be at its maximum. The Fed will not ease off until it is convinced that economic growth will continue despite the headwind of increasing fiscal drag. The end of QE3 will not be a cliff; it will be a
gradual wind down, commencing in late 2013 or early 2014, taking three to six months to finalize.
Other recent economic news has been mixed. Manufacturing and labor data has been soft, while residential real estate conditions remain positive and consumer confidence increased. The ISM Manufacturing Index dipped to a still‐positive 50.7 for April. Significantly, the employment sub‐index was down four points to a near‐neutral 50.2, meaning that hiring in manufacturing is cooling down. That is consistent with the weak payroll numbers we saw for March (+88K) and consistent with a weaker‐than‐expected ADP payroll survey for
April (which also came out this morning). The ADP payroll report showed that 119,000 private‐sector jobs were added in April. If we assume that government employment will be a drag of about 10,000 workers, that would put the official BLS payroll number for April at about 109,000, well below the consensus expectation of 150,000. The BLS numbers for April are due out Friday morning. Construction spending for March declined by 1.7 percent as total publically funded construction declined by 4.1 percent. Consumer confidence increased sharply in April according to the Conference Board. Their index increased from 61.9 in March to 68.1 in April. House prices continue to firm up. The Case‐Shiller 20‐City composite index increased by 1.2 percent from January to February. The index is now up 9.3 percent from a year ago. The Dallas Fed’s Texas Manufacturing Index fell from a positive 9.9 to a near‐neutral ‐0.5 in April. The Chicago Purchasing Managers Index fell to
4 9.0 for April, indicating deteriorating regional manufacturing conditions there.
Market Reaction: U.S. equity markets remained in the red after the FOMC announcement. Treasury yields are falling. Crude oil is down to $91.19/barrel. The dollar is down against the yen and the euro.
Comerica Bank’s Michigan Economic Activity Index increased in February, up 0.1 points to a level of 117.8. The February index reading is 47 points, or 66 percent, above the index cyclical low of 70.9. The index averaged 114 for all of 2012, 11 points above the index average for 2011. January’s index reading was revised up from 101.1 to 117.8.
“Our Michigan Index shows a gradual improving trend from late 2012 into early 2013, indicating that the Michigan economy is continuing to strengthen. The index components were mixed for February, with payrolls, state sales taxes, hotel occupancy and motor vehicle production stronger. Exports, unemployment insurance claims and residential building permits were weaker,” said Robert Dye, Chief Economist at Comerica Bank. “U.S. auto sales have flattened out through early 2013 as households react cautiously to fiscal tightening. I expect to see auto sales moderately increase through the year, bolstered by improving conditions for residential real estate. Positive signals from commercial real estate markets are good news for western Michigan manufacturers.”
The Michigan Economic Activity Index consists of seven variables, as follows: nonfarm payrolls, exports, sales tax revenues, hotel occupancy rates, continuing claims for unemployment insurance, building permits, and motor vehicle production. All data are seasonally adjusted, as necessary, and indexed to a base year of 2008. Nominal values have been converted to constant dollar values. Index levels are expressed in terms of three-month moving averages.
Real Disposable Income Contracts Rapidly in Q1, Spending Supported by Credit
- U.S. Personal Income increased by a modest 0.2 percent in March as job growth cooled.
- Real Disposable Personal Income gained 0.3 percent in March after declining by 4.0 percent in January.
- Real Personal Consumption Expenditures were up by 0.2 percent in March.
- The PCE Price Index decreased by 0.1 percent in March as gasoline prices eased.
Income and spending data for March show modest gains after adjusting for inflation. But for the first quarter as a whole, real disposable personal income (after inflation and taxes) showed the biggest quarterly drop since the Great Recession. Real disposable personal income contracted at a 5.3 percent annualized rate in Q1 due primarily to the drag from the payroll tax increase that took effect in early January. Despite the drag on spendable dollars, real consumer spending for the first quarter increased at a solid 3.2 percent annual rate. The divergence of income and spending in Q1 cannot be sustained indefinitely. Weather effects made car sales look better in Q1 than they really were by depressing sales last October. Also, consumers still appear to be willing to take on cheap auto loans to buy very affordable cars. The personal saving rate has taken a step down as households try to maintain consumption while paying higher taxes. The saving rate for February and March was 2.7 percent, well below the near 3.5 percent saving rate we saw for much of last year. The rate spiked up to 6.5 percent in December as households steeled themselves for higher taxes, but now looks close to the dangerously low levels we saw prior to the recession. On the positive side, households are building equity in their homes quickly with the help of rising prices and low mortgage rates. Also, the Q1 bull run in stock prices has helped to ease the drag from weak wage growth.
In the current second quarter, expect consumption and income to line up more closely, with both showing only modest gains. Job growth remains the key ingredient for a vigorous economy. March was disappointing with just 88,000 payroll jobs added. April should do better, adding about 160,000 jobs, still not a huge number. The jobs numbers for April are due out this Friday morning. Inflation remains well contained. The PCE price index declined by 0.1 percent in March as gasoline prices rolled back. Over the previous 12 months, the PCE price index is up by just 1.0 percent. The core PCE price index (less food and energy) is up a tame 1.1 percent over the past 12 months. Low inflation and weak job growth will keep current highly accommodative Federal Reserve policy in place. No changes are expected to the near‐zero fed funds rate and to the current rate of bond purchases for QE3 at the upcoming two‐day FOMC meeting (this Tuesday and Wednesday).
The Pending Home Sale Index increased by 1.5 percent in March, following a 1.0 percent decline in February. This implies a reversal of the dip in existing home sales that we saw in March; down by 0.6 percent.
Market Reaction: U.S. equity markets opened with gains. The yield on 10‐year Treasury bond is down to 1.66 percent. NYMEX crude is up to $93.67/barrel. The dollar is up against the yen and down versus the euro.
April showers have been raining on U.S. economic data; it looks a bit soggy as we close out the month. GDP increased at a weaker-than-expected 2.5 percent annualized rate in the first quarter as weather played an outsized role. Colder than normal conditions of the first quarter appear to have put a damper on business investment, which grew at an unimpressive 2.1 percent rate. Inventories showed a big swing, declining by $47 billion ($2005) in the fourth quarter, and then growing by $37 billion in the first quarter. Inventories added about 1 percent to real GDP growth in Q1. The inventory swing came partially as a result of Hurricane Sandy depressing industrial production in the fourth quarter of last year, and partially as a result of last summer’s drought which caused a drawdown in agricultural inventories, which are now being built back up. Hurricane Sandy also skewed car sales late last year, making first quarter consumer spending look better than it really was. The other big mover in the GDP report was government spending which declined at a 4.1 percent annualized rate.
In the first quarter GDP data we see the whole (headline number) as definitely stronger than the sum of the parts. In the GDP report, it is the parts that mailer. The parts in the first quarter GDP report are indicative of an economy that remains hobbled and is not well poised to accelerate into mid-year. Business investment, normally an accelerator to GDP in the early stages of an economic recovery, was not much of an accelerator in the first quarter, and it was not much of an accelerator in Q2 and Q3 last year. So, for three out of the last four quarters business investment has not engaged normally. The first quarter lull in business investment was roughly coincident with the current lull in loan demand. Without that accelerator, the economy will feel cooler than suggested by headline GDP.
Initial claims for unemployment insurance fell to 339,000 for the week ending April 20. This points to a firmer number for April payroll employment than the weak +88K we saw for March. New orders for durable goods fell in March by 5.7 percent. Transportation is largely, but not exclusively, to blame for the recent volatility in this series. Ex-tran durable goods orders dipped by 1.4 percent in March. Commercial aircraft orders were off 48.2 percent.
Housing indicators for March have been mixed. New home sales increased by 1.5 percent and appear to be set to continue their upward trend. Existing home sales for March declined by 0.6 percent. They look a bit flat, essentially unchanged since last November.
Q1 Looks Better than it Was
Comerica Bank’s California Economic Activity Index climbed in February, gaining 3.3 points to a level of 104.1. February’s reading is 31 points, or 43 percent, above the index cyclical low of 72.7. The index averaged a revised 101 points for all of 2012, three points above the average for all of 2011. January’s index reading was revised to 100.8.
“Our revised California Index has pulled back up in early 2013 after slumping through the end of 2012,” said Robert Dye, Chief Economist at Comerica Bank. “Components of the index were mostly positive for February. Only exports and the Silicon Valley stock index were down for the month. Residential property markets continue to firm up in most areas, providing broad-based support to the state economy. Commercial property markets are also showing signs of improving.”
The California Economic Activity Index consists of eight variables, as follows: nonfarm payrolls, exports, sales tax revenues, hotel occupancy rates, continuing claims for unemployment insurance, building permits, Baker Hughes rotary rig count and the Silicon Valley 150 Index (SV150). All data are seasonally adjusted, as necessary, and indexed to a base year of 2008. Nominal values have been converted to constant dollar values. Index levels are expressed in terms of three-month moving averages.
Comerica Bank’s Texas Economic Activity Index fell slightly in February, declining 0.2 percentage points to a level of 105.5. The February reading is 34 points, or 48 percent, above the index cyclical low of 71.5. The index averaged 102 points for all of 2012, 10 points above the average for full-year 2011. January’s index reading was revised up to 105.7.
“Our Texas Index declined slightly again in February after a similar dip in January. Index components were mixed, with payrolls and drilling rig count higher. Exports, sales tax revenues, hotel occupancy, inverted unemployment claims and residential building permits all dipped in February,” said Robert Dye, Chief Economist at Comerica Bank. “Job creation remains a strong positive for the state and will help to support other components of the index going forward.”
The Texas Economic Activity Index consists of seven variables, as follows: nonfarm payrolls, exports, sales tax revenues, hotel occupancy rates, continuing claims for unemployment insurance, building permits and Baker Hughes rotary rig count. All data are seasonally adjusted, as necessary, and indexed to a base year of 2008. Nominal values have been converted to constant dollar values. Index levels are expressed in terms of three-month moving averages.
Starts Hit Million Unit Rate, Consumer Prices Dip, Output Boosted by Weather
- Housing Starts for March increased by 7.0 percent to a 1,036,000 unit annual rate.
- Permits for new residential construction dipped in March by 3.9 percent to a 902,000 unit rate.
- The Consumer Price Index fell by 0.2 percent in March as energy prices eased.
- The core CPI (excluding food and energy) gained just 0.1 percent in March.
- U.S. Industrial Production gained 0.4 percent in March as utility output was boosted by cold weather.
- Capacity Utilization in March increased to 78.5 percent.
U.S. housing starts crested the million unit mark in March for the first time since June 2008. Total housing starts jumped by 7.0 percent to a 1.036 million unit annual rate. As is often the case, the volatility came from the multifamily side where starts were up 26.9 percent for the month. Single‐family starts actually dipped by 4.8 percent after surging in February. Forward‐looking permits tell a less constructive story (literally) as permits declined by 3.9 percent to hit a 902,000 unit annual rate. Permits have remained in the low 900s since last November so we are seeing signs of a flattening out of residential construction, and here is where the risk lies. Because of strong demographic fundamentals and better credit controls, there is a low risk of an impending “correction” in housing. But rather the risk is that construction will flatten out as fiscal drag increases. A metric to watch is new home sales, which have increased, but not by as much as starts. New home sales were up 12.3 percent year‐to‐year in February, compared with a 34.8 percent increase in starts.
Consumer prices eased by 0.2 percent at the headline level in March as gasoline prices fell. Over the past 12 months the headline CPI is up 1.5 percent. Gasoline was down 4.4 percent in March after increasing by 8.6 percent in February. Other prices were also soft. Food was unchanged for the month. Apparel prices dipped by 1.0 percent, possibly held down by bad weather as retailers were stuck holding warm weather clothes despite a lingering winter in the Northeast (Punxsatawney Phil lied this year). The core CPI was up a sedate 0.1 percent in March. Falling crude oil prices through April will likely keep overall consumer prices well contained through the second quarter. U.S. industrial production gained 0.4 percent in March with help from the extended winter weather. Utility output was up 5.3 percent for the month after seasonal adjustment. Manufacturing output was soft, easing by 0.1 percent after a strong 0.9 percent gain in February. Motor vehicle output was up 2.9 percent in March but most other manufacturing sectors eased after a strong February. This mini‐cycle may be a result of inventory restocking after Hurricane Sandy.
Capacity utilization notched up to 78.5 percent in March.
Market Reaction: Equity markets are up. Treasury yields up. NYMEX crude oil is down to $87.72/barrel. The dollar is up against the yen and down versus the euro.