Despite some weakness at the end of the month brought on by lackluster economic news and fears about a possible oil glut, all three indexes finished in the black for the month of May. The tech-heavy NASDAQ has now recorded seven consecutive monthly gains for the first time in more than four years. The DOW rose 0.3% to close at 21,009, the NASDAQ rose 2.5% to close at 6,199 and the S&P, the index most closely followed by economists, rose 1.2% to close at 2,412.
CONSUMER CONFIDENCE FALLS TO 117.9
The New York-based Conference Board's Consumer Confidence Index fell to 117.9 in May after dropping to a downwardly revised 119.4 in April. The Present Situation Index rose slightly to 140.7 and the Expectations Index declined to 102.6 in May after dropping to 106.7 in April. The Conference Board said that despite the decline, consumers remain optimistic that the economy will continue to expand in the months ahead. Economists say a level of 90 indicates that the economy is on solid footing and a level of 100 or more indicates growth. Analysts caution that the real driver behind consumer spending is income growth and that labor market trends are a more accurate predictor of consumer behavior.
CONSUMER SPENDING RISES 0.4%
Consumer spending rose 0.4% in April and spending for March was revised from flat to a gain of 0.3%. Incomes grew 0.4% in April after rising a modest 0.2% in March. The saving rate was little changed at 5.9% of after-tax income. The personal consumption expenditures (PCE) price index excluding food and energy rose 0.2% in April after falling 0.1% in March and was up 1.5% in the 12 months through April. Core inflation is now running further behind the Fed's goal of 2%, but economists say that the 1.5% year-over-year increase is expected to mark the low on core PCE inflation, with the gauge moving up to 2% next year. Consumer spending is closely watched by economists because it accounts for 70% of U.S. economic activity.
CONSUMER PRICES RISE 0.2%
The Consumer Price Index (CPI) rose 0.2% in April after falling 0.3% in March, which had been the first monthly decline in 13 months. The CPI was up 2.2% from April 2016. Gasoline prices rose 1.2% in April and were up 14.3% from a year earlier. Core inflation, which excludes food and energy, rose 0.1% after falling 0.1% in March but was up 1.9% year-over-year. Consumer prices rose steadily from August through January, but the pace of increases has eased recently.
UNEMPLOYMENT DROPS TO 4.3%
The unemployment rate fell to a second consecutive decade-low of 4.3% in May after falling to 4.4% in April and the economy added 138,000 new jobs after adding 211,000 in April. Construction added 11,000 jobs, most likely reflecting typical seasonal hiring. Average hourly earnings rose 0.2% in May and were up 2.5% year-over-year. The labor force participation rate has stabilized in the past several months, but remains below the rates seen for both men and women over the past two decades. Productivity, inflation and wage growth have all been persistently sluggish. Fed Chair Janet Yellen has said that the economy needs to create just under 100,000 jobs a month to keep up with growth in the working-age population.
DURABLE GOODS ORDERS FALL 0.7%
Durable goods orders fell 0.7% in April after rising an upwardly revised 2.3% in March. It was the first decline in durable goods orders in five months. The decline was primarily due to a big drop in the volatile commercial aircraft category. Orders excluding transportation, which can also be a highly volatile category, dropped 0.4% in April after falling 0.2% in March. Orders for non-defense capital goods excluding aircraft, which are seen as a proxy for business spending, were essentially flat and orders for March were revised down from 0.5% growth to flat, creating speculation about where business investment is headed. Shipments in the same category, which factor into GDP, fell 0.1% in April and the gain for March was slashed to just 0.2%. The durable goods report is often both volatile and subject to sharp revisions.
CHICAGO PMI RISES TO 59.4
The Chicago Purchasing Managers’ Index (PMI) rose to 59.4 in May after rising to 58.3 in April. It was the fourth consecutive month the PMI increased. New Orders fell by 4.5 points to 61.4. Production continued to strengthen, rising 3.7 points to 63.2. Order Backlogs jumped out of contraction after five months of decline. Inventories rose by 2.2 points to 55.5 in May. Prices Paid eased for the third consecutive month, although this inflation indicator is up almost 13% since last year. Panelists reporting data for the PMI reported continuing increases in the price of steel and plastic products. Order backlogs rose 4.8 points but remained in contraction for the sixth consecutive month. May’s special question asked firms if they intended to expand their workforce in the next three months. More than half planned on hiring, suggesting that businesses are optimistic about demand over the summer. Of those who intend to hire, 40% plan on hiring permanent employees, 33% will hire temporary help and 27% plan to hire a mix of both. Some labor trends show that some firms are hiring more temporary employees in an attempt to control costs while others are having trouble finding qualified full-time workers.
WHOLESALE PRICES RISE 0.5%
The Producer Price Index (PPI) rose 0.5% in April after falling 0.1% in March and was up 2.5% over the past 12 months, the largest 12-month gain in five years. Energy prices rose 0.8% and food costs were up 0.9%. Core inflation, which excludes volatile food, energy and trade services prices, was up 0.7% in April and up 2.1% over 12 months. It was the largest 12-month gain on record, but records only date back to 2013, when the government revamped the way it tracks wholesale prices. The PPI for inputs to construction was up 3.6% in April after rising 3.5% year-over-year in March. Steady consumer demand and more stable commodity costs are expected to keep producer prices moving upwards; the strong dollar could moderate increases.
Q1 GDP REVISED UP TO 1.2%
GDP growth in the first quarter was revised up to 1.2% from the 0.7% first reported, according to the Commerce Department’s second estimate. Revisions were largely positive, with stronger consumer and business spending and less of a drop in government spending than in the initial estimate. Consumer spending rose at a 0.6% pace, up from the first estimate of 0.3%. Capital expenditures by businesses picked up broadly, led by a dramatic 28.4% jump in spending on structures such as mine shafts and oil wells. Fixed nonresidential investment rose at an 11.4% pace, up from earlier estimates of 9.4% and a fourth quarter increase of just 0.9%. Government spending fell 1.1% instead of the 1.7% first estimated. Net exports added 0.13% to growth and private inventories subtracted 1.07%. The report also offered the first estimate on corporate profits for the first quarter, which fell 0.3% from the fourth quarter of last year but were up 11.9% year-over-year. The profits pull back came after four consecutive quarterly gains. Profits were depressed by big legal settlements involving U.S. subsidiaries of Credit Suisse, Deutsche Bank and Volkswagen. First quarter GDP is traditionally hampered by residential seasonality items and other one-time items, according to Wells Fargo. Since 2000, first quarter GDP has averaged 1.0%, followed by an average growth of 2.6% in the second quarter. Many analysts are looking for a second quarter surge to growth of 3% or better and are forecasting growth for the entire year of around 2.3%, up from 1.6% GDP growth in 2016, which was the poorest showing in five years. Analysts believe the bounce back in the current quarter will be helped by job gains, rising wages and increased consumer confidence.
JOB OPENINGS LITTLE CHANGED
The number of job openings was little changed in March, up a slight 1.1% to 5.7 million from a downwardly revised February reading, according to the latest Jobs Opening and Labor Turnover Survey (JOLTS). Over the month, hires (5.3 million) and separations (5.1 million) were little changed. The quits rate remained at 2.1% and layoffs and discharges were unchanged at 1.1%. The share of workers leaving their jobs voluntarily is above the highs of last cycle and indicates that workers feel increasingly confident about their job prospects. A rising quits rate generally leads to faster wage growth. The JOLTS report is one of Fed Chair Janet Yellen’s preferred economic indicators.
FED HOLDS STEADY IN MAY
The Fed held interest rates steady in a range of 0.7% to 1% at their meeting in May, and a number of indicators are causing economists to predict that the earliest chance for another rate hike will be in June. The Fed raised rates 25 basis points in March, but the most recent economic figures point to weakness in the economy. While most analysts expect this weakness to be temporary, it is enough to cause the Fed to pause.
CBO LONG TERM FORECAST
The Congressional Budget Office’s (CBO) latest report to Congress is anything but optimistic. It says the national debt will double in the next 30 years to 150% of GDP and interest payments will become the largest budget line item. Federal spending is expected to soar over 22 years from 22% of GDP to 28%. And the CBO projects an average annual growth of just 1.9% over the next 30 years, sharply down from historic performance. Between 1974 and 2001, average growth was 3.3%. The Wall Street Journal points out that 3% annual growth would solve the debt dilemma and result in an economy that is $13 trillion larger in 30 years. That kind of growth would drive down the debt-to-GDP ratio to about 50%. Many blue-chip economists agree with the CBO that a growth rate of about 2% is the best we can do, but others argue that pro-growth policies could send GDP growth up in the right direction.
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