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SIMPLY ECONOMICS

Eating away at your GDP
Simply Economics - May 26, 2017
By Mark Pender, Senior Editor

  

Introduction

The bulls were forecasting 4 percent GDP for the second quarter, a big snap back that didn't sound impossible given how soft the first-quarter comparison was, at barely 1 percent. But April reports after April reports have been biting into the estimates, making perhaps 2 percent a more realistic target for the second quarter. From the factory to the consumer, the week's results aren't pointing to much risk of overheating.


 

The economy

Central to lifting GDP is stronger investment in new equipment, equipment that could give a boost to our low productivity. Orders for core capital goods — these are goods like machinery that are used to make other goods — have been dead  flat. It's what you don't see in the accompanying graph that counts, any growth at all over the last 3 months. This core excludes defense and aircraft and, for shipments, is a direct input into GDP. April doesn't look that good.


 

Durable orders generally weren't that good. Total orders fell 0.7 percent to $231 billion on weakness, not only in machinery, but also aircraft, metals, and electrical equipment. All this is in contrast to the unusual strength of anecdotal reports as well as the prior week's manufacturing jump in the industrial production report. In another contrast, shipments in the durables report fell 0.3 percent for a second straight dip. The durables trend is still favorable, but April didn't help.


 

Also not helping is an easing in the strength of the anecdotal reports. Markit's manufacturing sample is really the only one of the factory reports that never did catch fire. It peaked early in the year near 55 to indicate solid but not exceptional growth. The ISM report, in some contrast, peaked near 58 with order readings posting a 4-month streak in the 60s. But ISM has begun to slow as has Markit's reading with the May flash at 52.5 and the weakest in 8 months.


 

A big gain for GDP would probably require a major narrowing in the trade gap. But the advance report on goods trade isn't pointing to any improvement just yet. April exports fell 0.9 percent to $126 billion, once again swamped by imports which rose 0.7 percent to $193 billion. April's mismatch comes to exactly $67.6 billion which is $1.5 billion deeper than March's mismatch in what is yet another signal of second-quarter trouble.


 

Consumer goods are where the trouble's at, reflecting America's demand for foreign goods and lack of foreign demand for America's goods. April imports of foreign consumer goods rose to $51 billion for very noticeable year-on-year growth of 8.6 percent. Exports of consumer goods fell to a paltry $16 billion for a yearly gain of only 0.8 percent. The monthly gap here is $51 billion -- which means dollars moving from here to there. This is not keeping money in the family.


 

Another blow for the second quarter comes from inventories where advance data are pointing to an outright draw for April. Retail inventories fell unexpectedly to $614 billion while wholesale inventories posted their steepest draw in a year, to $592 billion. Manufacturing is the missing piece but would have to post an unlikely jump to make up the difference. Low inventories during times of slow growth point to intentional destocking and a retreat in business optimism.


 

Housing is another one in the second-quarter slow lane. Housing starts & permits, released earlier in the month, proved unexpectedly soft as did April's home sales data. New home sales, after jumping sharply in March, fell even more sharply in April, to a 569,000 annualized rate and a 4-month low. Existing home sales fell 2.3 percent in April to a 5.570 million rate. Spring housing is off to a slow start. Yet April aside, trends are still on the climb.


 

The existing home sales report tracks both single-family homes and condos. Here again trends for both, despite April weakness, are up. Yet single-family resales did fall 2.4 percent to a 4.950 million rate with condos down 1.6 percent to 610,000. Lack of sales punch isn't due to mortgage rates which are low – it is lack of consumer wealth that's to blame. But one plus for resales and wealth is prices, at a median $244,800 for year-on-year appreciation of 6.0 percent.


 

The FHFA house price index and Case-Shiller's 20-city index both offer detailed price data based on repeat transactions for individual properties. Their stories are the same with FHFA holding above 6 percent at 6.2 percent and Case-Shiller, whose next report will be posted in the coming week, at 5.9 percent and climbing. Six percent may not sound great, but it's not bad in a low wage, low inflation economy. For consumers, housing is still a big plus.


 

And home prices are a big factor supporting consumer confidence along with high levels of employment and expectations for major growth initiatives under the new administration. However, one measure, consumer sentiment, hasn't moved up in quite a while, not since the first of the year. Is this a hint that spirits are growing grey? The consumer confidence index, which has continued to climb, will be a highlight of the coming week's calendar.


 

Spirits may or may not be sagging but they never did pan out to much for actual spending. April's retail sales report, released at mid-month, was the first blow to the second quarter outlook, unable to rebound much despite an easy comparison against a weak March. For the first quarter, consumer spending managed only a 0.6 percent price-adjusted annualized rate, the worst in 7 years. And the sentiment index isn't pointing to new strength ahead.


 

Markets: Putting the genie back in

QE magic is back in focus amid plans to shrink the Fed's balance sheet, one swollen by the wave of an electronic wand. The Fed created instant money to buy the bonds and has been giving the Treasury the interest it earns on all the Treasuries and mortgage-backed securities along the way. But when the shrinking begins the principal, when these bonds mature, will go back from where it came, into the Fed's genie bottle. Printing money does work and, for the Fed at least, is no crime!


 

Year-end is a possible start for the big shrink. The Fed has kept its balance sheet steady at $4.5 trillion by going back to the markets and buying new bonds as the old ones it holds mature. The plan is to continue to go back in but less so each time. The Fed's holdings will shrink slowly at first and then at an increasing and predictable rate. Details are being worked out including the time frame. The upshot: one less buyer (and a very big one) in the bond markets.


 

Bonds didn't show much reaction to the Fed's plans which have been expected all year. The Fed's deliberate effort to spell its intentions out carefully and ahead of time are aimed at avoiding any hiccups. But oil definitely had the hiccups in the week, falling sharply following OPEC output cuts that also completely met expectations. It's called buy the rumor and sell the fact. Oil rallied all month into OPEC's meeting then swung lower on Thusday then higher to end the week down only $1 near $50.


 

Markets at a Glance Year-End Week Ended Week Ended Year-To-Date Weekly
2016 19-May-17 26-May-17 Change Change
DJIA 19,762.60 20,804.84 21,080.28 6.7% 1.3%
S&P 500 2,238.83 2,381.73 2,415.82 7.9% 1.4%
Nasdaq Composite 5,383.12 6,083.70 6,210.19 15.4% 2.1%
     
Crude Oil, WTI ($/barrel) $53.71 $50.36 $49.80 -7.3% -1.1%
Gold (COMEX) ($/ounce) $1,152.50 $1,255.30 $1,271.70 10.3% 1.3%
Fed Funds Target 0.50 to 0.75% 0.75 to 1.00% 0.75 to 1.00% 25 bp 0 bp
2-Year Treasury Yield 1.21% 1.27% 1.30% 9 bp 3 bp
10-Year Treasury Yield 2.45% 2.23% 2.25% –20 bp 2 bp
Dollar Index 102.26 97.13 97.4 -4.8% 0.3%

 

The bottom line

The economy is well up from the desperate days in 2008 when the Fed embarked on its unconventional move. But ongoing acceleration is in doubt. The Trump administration is shooting for 3 percent GDP three years from now, a full-year rate that hasn't been posted since way back in 2005. Based on manufacturing, trade, housing and not to mention the consumer, there's plenty of improvement that has to be made. The Fed may or may not raise rates at the June FOMC, but if they do it won't be because the second-quarter is surging.


 

Week of May 29 to June 2

Following Monday's Memorial Day, an extremely heavy week kicks off on Tuesday with the biggest piece yet of second-quarter GDP: April consumer spending. The report will also include the Fed's PCE inflation gauges where continued weakness is the call. Consumer confidence, which in contrast to consumer spending has been very strong, follows on Tuesday amid expectations for continued strength. Pending home sales follow on Wednesday and will offer an advance indication on the Spring success of the resale market. But the Beige Book will be Wednesday's highlight offering the Federal Reserve's assessment of the economy and setting the backdrop for June's FOMC. Thursday will start off with ADP's payroll estimate, which can be erratic, followed by ISM's manufacturing report, which has been strong. Construction spending, which has been flat, is also out Thursday. Econoday's consensus for May nonfarm payroll growth is a very solid 185,000 with the unemployment rate seen holding at a very low 4.4 percent. Average hourly earnings could be the key to this report but are not expected to show much improvement in what would underscore the trouble for the consumer. Trade data will also be posted Friday morning and offer another key input for second-quarter GDP.


 

Tuesday


 

Personal Income for April

Consensus Forecast, Month-to-Month Change: 0.4%

Consensus Range: 0.3% to 0.5%


 

Consumer Spending

Consensus Forecast, Month-to-Month Change: 0.4%

Consensus Range: 0.3% to 0.5%


 

PCE Price Index

Consensus Forecast, Month-to-Month Change: 0.2%

Consensus Range: -0.1% to 0.2%


 

PCE Price Index

Consensus Forecast, Year-on-Year Change: 1.7%

Consensus Range: 1.5% to 1.7%


 

Core PCE Price Index

Consensus Forecast, Month-to-Month Change: 0.1%

Consensus Range: 0.1% to 0.1%


 

Core PCE Price Index

Consensus Forecast, Year-on-Year Change: 1.5%

Consensus Range: 1.4% to 1.6%


 

Consumer spending is expected to improve in April, at a consensus gain of 0.4 percent against however a very weak comparison of no change in March. Personal income was also soft in March, up only 0.2 percent, and a better performance is expected with the consensus also at 0.4 percent. Price data, however, are not expected to rebound much with the consensus for the very closely watched core PCE index (less food & energy) looking for only a 0.1 percent gain and a year-on-year rate of 1.5 percent which would be 1 tenth lower than March.


 

Case-Shiller, 20-City Adjusted Index for March

Consensus Forecast, Month-to-Month Change: 0.8%

Consensus Range: 0.4% to 0.9%


 

Case-Shiller, 20-City Unadjusted Index

Consensus Forecast, Month-to-Month Change: 0.4%

Consensus Range: 0.3% to 0.4%


 

Case-Shiller, 20-City Unadjusted Index

Consensus Forecast, Year-on-Year Change: 5.8%

Consensus Range: 5.3% to 6.2%


 

Housing demand has been firm this year with Case-Shiller's 20-city index shooting 0.7 percent and 0.9 percent higher in the last two reports, lifting the year-on-year pace toward the 6 percent line. The FHFA house price index is already over 6 percent but the consensus for March's 20-city index, despite a sizable monthly gain, calls for a 1 tenth dip to 5.8 percent.


 

Consumer Confidence Index for May

Consensus Forecast: 119.0

Consensus Range: 117.0 to 121.0


 

Holding near 20-year highs, the consumer confidence index has been showing the most strength of any of the consumer gauges. The report's sample has been reporting strong demand in the labor market and expects demand to remain strong through the year. Only marginal retracement is expected for the May report with the Econoday consensus at 119.0 vs April's 120.3.


 

Dallas Fed General Activity Index for May

Consensus Forecast: 15.4

Consensus Range: 6.0 to 20.0


 

Reflecting recovery in the energy sector, the Dallas Fed general activity index has emerged from 2-1/2 years of deep contraction with surging strength this year. Forecasters see the general activity index for May holding steady at a very strong 15.4 vs April's 16.8.


 

Wednesday


 

Chicago PMI for May

Consensus Forecast: 57.5

Consensus Range: 56.0 to 60.0


 

The Chicago PMI has been uncharacteristically steady the last three reports, holding in the high 50 range consistent with very strong growth. New orders, at a 3-year high, were a highlight of the April report and point to strength for shipments and employment as well as for other activity in May. This report tracks both the non-manufacturing and manufacturing sectors of the Chicago-area economy.


 

Pending Home Sales Index for April

Consensus Forecast, Month-to-Month Change: 0.5%

Consensus Range: -0.5% to 1.4%


 

This year's month-to-month path of existing home sales has been accurately telegraphed by the pending home sales index which tracks initial contract signings. This index fell 0.8 percent in March and was followed by an even more sizable decline in final sales. But housing data in general have been strong and forecasters see a rebound for April, at a consensus gain of 0.5 percent.


 

Beige Book

Prepared for the June 13 & 14 FOMC Meeting


 

Increasing shortage in the labor market has been the warning this year from the Beige Book. Otherwise modest-to-moderate has been the repeated assessment for most sectors of the economy. One key area, however, described as soft has been consumer spending. The latest edition would have to be unusually soft throughout to scale back expectations for a rate hike at the mid-June FOMC.


 

Thursday


 

Total Unit Vehicle Sales for May

Consensus Forecast, Annualized Rate: 16.9 million

Consensus Range: 16.7 to 17.1 million


 

Unit vehicle sales turned higher in April after sinking the first three months of the year. The same is true for the motor vehicle component of the retail sales report which has been one of the big disappointments so far in 2017. Forecasters do not see total unit vehicle sales for May extending April's bounce, at a consensus 16.9 million annualized rate which would be unchanged.


 

ADP, Private Payrolls for May

Consensus Forecast: 170,000

Consensus Range: 155,000 to 195,000


 

ADP is still in the dog house after its big miss in March when it called for great strength in payrolls that turned out soft. Forecasters see ADP's call for May coming in at a consensus 170,000 vs 177,000 in April.


 

Initial Jobless Claims for May 27 week

Consensus Forecast: 239,000

Consensus Range: 235,000 to 245,000


 

Jobless claims are at 40-year lows and pointing to unusually strong demand for labor. Forecasters sees initial claims coming in at 239,000 in the May 27 week vs 236,000 in the prior week.


 

Nonfarm Productivity, 2nd Estimate, 1st Quarter

Consensus Forecast, Annualized Rate: -0.5%

Consensus Range: -0.6% to 0.2%


 

Unit Labor Costs

Consensus Forecast, Annualized Rate: 2.9%

Consensus Range: 2.2% to 3.0%


 

The first estimate for nonfarm productivity came in at minus 0.6 percent as it took more hours to produce at a slower rate. Weak productivity raises the cost of labor as unit labor costs came in at an annualized 3.0 percent rate. Forecasters see little change for the second estimate with the productivity consensus at minus 0.5 percent and labor costs at plus 2.9 percent.


 

PMI Manufacturing for May, Final

Consensus Forecast: 53.0

Consensus Range: 52.5 to 54.4


 

Unlike the rival ISM, Markit Economics' manufacturing PMI has not been pointing to outstanding acceleration for the manufacturing sector. To the contrary, loss of momentum was the signal in both April and the May flash where orders and employment were subdued and inventories, in a sign of defensiveness, were down. Forecasters see the final reading at a consensus 53.0 in what would be a noticeable improvement from the 52.5 flash.


 

ISM Manufacturing Index for May

Consensus Forecast: 54.6

Consensus Range: 53.7 to 55.8


 

After beating Econoday's consensus for seven straight months, the ISM manufacturing index fell short of expectations in April. Yet on its own, the April report was very solid and included sizable gains for new orders and also production, consistent with what turned out to be strength in the government's industrial production report. The sample's backlogs are building and delivery times slowing, both positive indications for the factory sector. Forecasters are calling for a steady and solid 54.6 in May vs April's 54.8.


 

Construction Spending for April

Consensus Forecast, Month-to-Month Change: 0.5% 

Consensus Range: -0.3% to 0.8%


 

Construction spending has been flat and held back by government spending on public buildings. Private nonresidential spending has been mostly positive while residential spending has been clearly solid and led by multi-family units. Against March's 0.2 percent decline, the Econoday's consensus is calling for a 0.5 percent rebound in April.


 

Friday


 

Nonfarm Payrolls for May

Consensus Forecast: 185,000

Consensus Range: 140,000 to 210,000


 

Unemployment Rate

Consensus Forecast: 4.4%

Consensus Range: 4.3% to 4.5%


 

Private Payrolls 

Consensus Forecast: 172,000

Consensus Range: 140,000 to 200,000


 

Manufacturing Payrolls 

Consensus Forecast: 6,000

Consensus Range: 5,000 to 10,000


 

Average Hourly Earnings

Consensus Forecast, Month-to-Month Change: 0.2%

Consensus Range: 0.2% to 0.3%


 

Average Hourly Earnings

Consensus Forecast, Year-on-Year Change: 2.6%

Consensus Range: 2.5% to 2.7%


 

Average Workweek

Consensus Forecast: 34.4 hours

Consensus Range: 34.4 to 34.5 hours


 

A gain of 185,000 is Econoday's May consensus for nonfarm payrolls in what would be a second straight solid showing following April's 211,000 rise. In another sign of strength, the unemployment rate is expected to hold at an expansion low of 4.4 percent. Average hourly earnings, which have been weak, are expected to remain weak, up only 0.2 percent vs 0.3 percent in April and making for a year-on-year rate of 2.6 percent vs April's 2.5 percent. Other calls are for a 172,000 rise for private payrolls, no change at 34.4 hours for the workweek, and a 6,000 rise for manufacturing payrolls.


 

International Trade Balance for April

Consensus Forecast: -$46.1 billion

Consensus Range: -$47.0 to -$42.9 billion


 

Forecasters see the international trade gap for goods and services widening sharply to a consensus $46.1 billion in April from $43.7 billion in March. This would be an early negative for second-quarter GDP. The consensus is in line with advance data on the cross-border goods deficit which, reflecting weak exports, widened noticeably. Any surprises in April's report could affect expectations for second-quarter GDP.


 

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