This week’s economic data showed that the U.S. economy is vulnerable to a combination of exogenous drags and potential self-inflicted wounds despite a visible endogenous growth story. The May employment data confirms a downshift in hiring that began in March. Increasing anxiety over an uncertain global macroeconomic environment is taking a toll on fledgling animal spirits in a still-unfolding economic drama. Higher gasoline prices earlier in the year, a worsening crisis in the Eurozone, weaker growth in Asia and concern about the approaching “Fiscal Cliff” in the U.S. may all be weighing on business confidence despite the ongoing improvement to household balance sheets, gains in auto sales and signs of strengthening in housing markets. A net of just 69,000 payroll jobs were added to the U.S. economy in May, well short of what is needed for a self-sustaining expansion. Also, the weak May jobs numbers add significant weight to the theory that the slowdown in job creation that began in March is not just an echo of the strong job growth we had from December through February, but rather it represents a meaningful downshift in U.S. economic growth heading into the current second quarter. The U.S. unemployment rate ticked up to 8.2 percent in May, the first monthly increase since June 2011. Personal income increased by a weak-to-moderate 0.2 percent in April. With zero inflation registered by the PCE price index due to falling gasoline prices, real disposable personal income increased by 0.3 percent for the month. Nominal consumer spending gained 0.3 percent. Again, after zero inflation, real consumer spending also gained 0.3 percent. That was good news for Q2 GDP, showing that consumer spending is not yet ready to bug out. However, with consumers spending ahead of income, the personal saving rate dropped a tenth to 3.4 percent. In a weak job market there is a limit to how far consumers will lean over their skis before they have to pull back, setting up a weak third quarter unless job creation reaccelerates. One factor that may allow consumers to keep leaning is the relatively strong condition of household balance sheets. Consumer deleveraging has left households with ample room to take on auto loans and increase some credit card debt. Whether they will have the confidence to do so in an otherwise sluggish economy this summer remains to be seen. The ISM Manufacturing Index for May fell to 53.5, a still-positive reading that indicates healthy expansion in the manufacturing sector. Construction spending for April increased by 0.3 percent. Weakness in total public construction, expected as fiscal stimulus spending unwinds, was countered by gains in private residential, particularly multifamily construction. The second estimate of real GDP growth for 2012Q1 was dialed down to 1.9 percent, with a little less consumer spending being the lead culprit in the revision. Warm weather may have been a contributing factor as consumer spending on services, which includes home utility bills, was reduced. The Case-Shiller 20-City House Price Index has now improved for the last two months. The 20-City HPI for March gained 0.1 percent, after increasing by 0.2 percent in February. Of the 20 cities surveyed in March, 16 showed flat or increasing prices. Atlanta, Chicago, Detroit and Minneapolis showed price declines. A turning point in housing markets is increasingly visible, with better pricing, more sales and increasing construction. In order to sustain that momentum we will need to see moderate job growth this year and we will need to avoid a self-inflicted recession due to the fiscal cliff early next year. The global economic drama is still unfolding.
Click here for the complete Comerica Economic Weekly for June 1, 2012: CMAEconWeekly060112.