Yellen Testimony, Q1 Productivity, April ISM-NMF, March Trade

No Surprises from Yellen Testimony, Eyes on Housing 

  • FOMC Chairwoman Janet Yellen delivered reassuring testimony before the Joint Economic Committee.
  • U.S. Nonfarm Productivity declined at a 1.7 percent annual rate in the first quarter of 2014.
  • Unit Labor Costs increased at a 4.2 percent annual rate in Q1, boosted by weak Q1 GDP growth.
  • The ISM Nonmanufacturing Index for April improved to a solid 55.2.
  • The U.S. International Trade Gap narrowed to $40.4 billion in March, implying even-worse Q1 GDP.

In her testimony today before the Joint Economic Committee of Congress, Federal Open Market Committee Chairwoman Janet Yellen delivered a reassuring message with no surprises. She acknowledged the pause in Q1 real GDP growth, but described the pause as “mostly reflecting transitory factors.” She did strike a cautionary note on housing activity, saying that readings have been disappointing and that the sector “bears watching.” In the Q&A round, Yellen acknowledged that the FOMC plans to reduce asset purchases by the end of this year. She also suggested that the FOMC would eventually end its re-investment of maturing assets. She expects to eventually include that concept in forward guidance as the Fed proceeds through the complex unwinding process. While Yellen would not acknowledge a specific timetable for fed funds liftoff, we continue to expect to see the first increase in the fed funds rate around mid-year 2015.

Nonfarm productivity declined at a 1.7 percent annual rate in the first quarter, as GDP registered a dismal 0.1 percent growth. The U.S. international trade gap for March narrowed, but by less than expected, and that implies that Q1 real GDP growth will be revised down, to a small negative, when the second estimate of Q1 GDP is released on May 29. A downward revision to Q1 GDP implies, in turn, a downward revision to the just-released Q1 productivity numbers, and a symmetrical upward revision to Q1 unit labor costs (ULC). As reported now, ULC for Q1 increased by an eye-catching 4.2 percent. We do not believe that this signals imminent inflationary pressure because the Q1 drop in productivity and the related increase in ULC will not be sustained in subsequent quarters. On a year-over-year basis, Q1 productivity is still up 1.4 percent and ULC is up a meager 0.9 percent. We expect to see real GDP growth moderate to near 3 percent for the remainder of 2014. We also expect hiring to downshift to the 190,000-200,000 net new jobs per month range, after ballooning by 288,000 jobs in April.

The ISM Nonmanufacturing Index for April improved to 55.2. As previously reported, the ISM Manufacturing Index for April also improved, to 54.9. With both broad indexes improving, and solidly above 50, we have a strong indicator that the U.S. economy is picking up steam after the winter freeze. Seven out of ten ISM-NMF sub-indexes improved in April. Anecdotal comments were generally positive. Fourteen industries reported growth in April. Only four reported contraction.

The U.S. international trade gap narrowed in March to $40.4 billion as both exports and imports increased for the month. The improvement in the trade gap was less than the estimate used by the BEA to calculate Q1 GDP, so that implies a downward revision to Q1 real GDP growth to about -0.5 percent. Exports increased by $3.9 billion in March, while imports increased by $2.5 billion.

Market Reaction: U.S. equity prices dipped ahead of Yellen’s testimony, but have since recovered. The yield on 10-year Treasury bonds is down to 2.59 percent. NYMEX WTI crude oil is up to $100.83/barrel. Natural gas futures are down to $4.80/mmbtu.

For a PDF version of this Comerica Economic Alert click here: FOMC 05-07-12.

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