Monthly Economic Review: The U.S.

In her May 22 speech, Federal Reserve Chair Janet Yellen stated that the U.S. economic recovery slowed down a bit, but was still pretty solid overall. She also said, “If the economy continues to improve as I expect, I think it will be appropriate at some point this year to take the initial step to raise the federal funds rate target.” This has been interpreted by market players as a rate hike by September 2015. In contrast, the International Monetary Fund (IMF), via a May 28 report, encouraged the U.S. to defer a rate hike until the first half of 2016 at the very least, citing a weaker economic outlook as the primary reason. So who do you think is right? The Fed? Or the IMF? Perhaps this monthly economic review can help you decide.

U.S. Growth

Annualized Q1 2015 U.S. GDP contracted by 0.7%, a very significant disappointment when compared with the 2.2% expansion for Q4 2014. In the May 28 IMF report mentioned earlier, the IMF cited “unfavorable weather, a sharp contraction in oil sector investment, the West Coast port strike, and the effects of the stronger dollar” as the main factors for the contraction. Other analysts are saying the same things. The IMF, though, was quick to say that the contraction is only temporary because of a “solid labor market, accommodative financial conditions, and cheaper oil.” Although that ultimately did not stop the IMF from downgrading the growth forecast for the U.S. from 3.1% to 2.5%, an expansion is still an expansion, right?  And an expansion is almost always better than contraction in my book.

Employment

The latest jobs report from the U.S. shows that non-farm payrolls was better-than-expected at 280K (221K previous). Average hourly earnings also increased by a respectable 0.3%, an improvement over the previous 0.1%. The only downer was the jobless rate (which ticked upwards to 5.5% from 5.4%), although the labor force participation rate remained at 62.9% and the civilian labor force increased by 397K in May. So, it’s still somewhat healthy given the fact that the economy wasn’t able to quickly absorb the labor force increase is not a trend yet and could just be a fluke.

Consumer Spending

The advance monthly readings for both headline and core retail sales were better-than-expected at 1.2% and 1.0% respectively. The University of Michigan’s prelim consumer survey results for June were also very optimistic. Consumer sentiment was 94.6 (90.7 previous), current economic conditions was 106.8 (100.8 previous), and consumer expectations was 86.8 (84.2 previous). New home sales for April also increased to 517K while the previous reading was slightly revised upwards from 481K to 484K.

Overall, consumer sentiment and consumer spending are pretty solid as well, although some analysts made a big fuss about the stalled reading for personal spending in April (0.0% actual, 0.2% previous).

Business Conditions

The Institute for Supply Management’s (ISM) manufacturing PMI for May was better-than-expected at 52.8 (51.5 previous) while non-manufacturing PMI declined a bit to 55.7 (57.8 previous). Both PMI readings are above 50, indicating industry expansion, so it’s all good in the grand scheme of things, right? Not so fast! Industrial production unexpectedly declined by 0.2% in May and the reading for April was downgraded to -0.5% from -0.3%. The strong Greenback was the most commonly cited culprit for the weakness since it made U.S. exports less competitive. On a more upbeat note, the NAHB housing market index for June was better-than-expected at 59 (54 previous), and set a new yearly high to boot.

Inflation

Moving forward, the core PCE price index for May remained flat at 0.1% for the fourth consecutive month now. U.S. CPI data for May will be coming out this week, but the month-on-month headline and core CPI readings for April were at odds with each other since core CPI increased to 0.3% (0.2% previous) while headline CPI went down to 0.1% (0.2% previous). On an annualised basis, headline CPI was down in the dumps at -0.2% while core CPI remained unchanged at a solid 1.8%. On a more upbeat note, the headline and core PPI readings for May were very optimistic, with headline PPI increasing by 0.5% (-0.4% previous) and core PPI increasing by 0.1% (-0.2% previous).

Summary

Overall, Q1 2015 U.S. GDP did contract, but expected to be temporary. The labor market is pretty solid and this, in turn, tends to bring solid consumer sentiment and consumer spending. Poor personal spending for April caused some concern but retail sales data for May managed to offset this. And while U.S. consumers may be pretty optimistic, U.S. businesses–especially those in the export-driven manufacturing sector–are having a bad time due to a strong Greenback. U.S. businesses reliant on domestic demand, such as the housing sector, are doing pretty well, though. As for inflation data, they’re not exactly stellar nor are they dismal. But that also means that the Fed doesn’t really have a reason to raise interest rates based on inflation data alone.

To conclude, it looks like the IMF’s opinion that the Fed should wait to hike rates is more prudent and reasonable given the currently available data. Low inflation, for one, doesn’t really support a rate hike just yet, and while employment is pretty solid for now, there is a possibility that it could deteriorate over time due to a weakening manufacturing sector. Of course, this doesn’t take into account any future, optimistic surprises, so the picture is still not clear and we’ll just have to sit in “wait-and-see mode” for now.

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