Monthly Economic Review: The United States

After writing yesterday’s piece on the most recent NFP report and what it could mean for the Greenback’s forex price action, I decided to give y’all a broader view by giving ya a one-stop-shop for the most recent data points from Uncle Sam.

Growth

The final reading for Q2 2015 GDP was revised higher to 3.9% from 3.7%, which is a very significant improvement over the previous quarter’s 0.6% increase. The U.S. Bureau of Economic Analysis (BEA) cited “personal consumption expenditues (PCE) and nonresidential fixed investment [increasing] more than previously estimated” as the main reasons for the upward revision. As for the specifics of the GDP report, the main drivers for the quarter-on-quarter growth were a 3.6% increase in consumer spending (1.8% previous), a 2.6% increase in government spending (-0.1% previous), and exports expanding at a faster rate (5.1% current, -6.0% previous) than imports (3.0% current, 7.1% previous).

While the quarter-on-quarter reading looks rather impressive, it loses some of its awesomeness when you look at the year-on-year reading since Q2 2015 only grew by 2.7% (2.9% previous) since private domestic investment only grew by 5.7% on an annualized basis (7.6% previous). Another reason for the slight slowdown is that exports grew at a slower rate (1.5% current, 2.6% previous) than imports (4.8% current, 6.5% previous).

Consumer Spending & Sentiment

The headline reading for August’s retail sales was a bit of a letdown since it only increased by 0.1% (0.6% previous) month-on-month and by 0.2% (0.7% previous) on an annualized basis. The core reading was a bit of a downer too because it only posted a 0.1% increase, although the previous reading was upgraded to 0.6% from 0.4%. Also, the general trend for both annualized and monthly readings appear to be to the downside since the monthly reading has been slowing down after posting a 1.5% increase back in March of this year while the year-on-year reading has been relatively subdued after posting a 3.7% increase back in January of this year.

Moving on, the final reading for the University of Michigan’s (UOM) Index of Consumer Sentiment was revised higher to 87.2 from 85.7, but it still pales in comparison to August’s 91.9 and it’s still the lowest reading ever in an 11-month period. The other indices saw decreases as well: Current Economic Conditions fell to 101.2 from 105.1 while the Index of Consumer Expectations slumped to 78.2 from 83.4.

Interestingly enough, commentary from the UOM stated that “Although most believe the domestic economy is still largely insulated, they have lowered the pace of job and wage growth that they now anticipate,” which is exactly what happened in the most recent NFP report. Also, the lower consumer sentiment may mean lower consumer spending in the future, which would be pretty bad for the U.S. economy.

Business Conditions & Sentiment

Industrial production slumped by 0.4% in August after posting a decent 0.9% increase back in July. Looking at the major industry groups, the main drags were a 0.6% contraction in the mining sector and a 0.5% decline in the manufacturing sector. Also, the headline and core readings for durable goods orders took a hit since the core reading is now stagnant at 0.0% (0.4% previous) while the headline reading showed a 2.0% contraction (+2.2% previous).

With regard to the manufacturing sector, the September readings for manufacturing PMI from Markit and the Institute for Supply Management (ISM) are at odds again, since Markit reported a slight uptick from 53.0 to 53.1, which means that the expansion expanded by a tiny bit. ISM, meanwhile, is saying that the manufacturing sector is about to go into stagnation since it printed a 50.2 reading (51.1 previous), which is just barely above the 50.0 neutral mark.

Both reports also have conflicting outlooks with regard to production since Markit noted that production had a “modest rebound” from its 19-month low in August while ISM’s Production Index dropped by 1.8 points to 51.8. They both agreed that employment levels were pretty bad, though, with the ISM’s Employment Index coming in at 50.5 (51.2 previous) while Markit simply stated that the “latest rise in staffing levels was the slowest in the current 27-month period of expansion.”

Inflation

August’s headline CPI stumbled into negative territory (-0.1% current, +0.1% previous), which was a great disappointment to many forex traders, especially the interest rate junkies. The main culprit for the decline was the 2.0% slump in the energy index brought about by a 8.1% drop in fuel oil and a 4.1% slide in gasoline prices.

On a yearly basis, CPI remained stable at 0.2%, which looks great on the surface, but is rather bad when you consider that 0.2% is historically low and a far cry from the U.S. Fed’s target of 2.0%. The energy index also happens to be the major drag since it contracted by a hefty 15% due to a stinging 23.3% decline in gasoline prices and a painful 34.6% drop in the fuel oil sub-component.

Conclusion

Overall, the most recent data dump from the U.S. isn’t exactly painting an optimistic picture. True, the U.S. economy is still growing but inflation remained stagnant at historically low levels due to declining oil prices, which may dissuade the Fed from hiking rates. Also, the available economic data points for the Q3 months aren’t really very impressive.

And even though U.S. Fed Chairperson Janet Yellen said in a recent speech that “Most FOMC participants, including myself, currently anticipate that achieving these conditions will likely entail an initial increase in the federal funds rate later this year,” she also said that “if the economy surprises us, our judgments about appropriate monetary policy will change,” so a rate hike is not yet guaranteed.