US Economy May 2016

CONSUMER CONFIDENCE FALLS TO 94.2

The New-York based Conference Board’s Consumer Confidence Index fell to 94.2 in April after rising to a slightly downwardly revised 96.2 in March. The Present Situation Index rose to 116.4 from an upwardly revised 114.9. The Expectations Index dropped to 79.3 in April from a downwardly revised 83.6 in March. The Conference Board said that, on balance, consumers are cautious but not pessimistic and don’t think the economy is going to get worse. 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 0.1%

Consumer spending rose 0.1% in March after falling 0.1% in February. Incomes rose a solid 0.4%. Consumer spending has slowed for three straight quarters, and fell to a 2.1% annual rate in the first three months of 2016. When adjusted for inflation, consumer spending was unchanged after increasing an upwardly revised 0.3% in February. Core PCE prices, which exclude food and energy prices, rose 0.1% in March after rising by 0.2% in February. Labor costs rose 1.9% in the 12 months through March, well below the 3% threshold that economists say is needed to bring inflation closer to the Fed's inflation target. Spending on services also rose 0.1%, while spending on goods rose 0.2%. Personal income increased 0.4% to $57.4 billion in March, up from a 0.1% gain in February. Outlays for non-durable goods, which include gasoline, rose 0.7% in March. It was the slowest rate of increase in two years. Economists expect consumer spending to rebound in the second quarter as wages steadily increase. Consumer spending is closely watched by economists because it accounts for 70% of U.S. economic activity.

CONSUMER PRICES RISE 0.1%

The Consumer Price Index (CPI) rose 0.1% in March after falling 0.2% in February. In the 12 months through March the CPI increased just 0.9%. Core prices, which strip out volatile food and energy costs, rose 0.1% in March after increasing 0.3% in February. In the 12 months through March core inflation was up 2.2%. Falling energy prices and the strong dollar are primarily responsible for holding down inflation. Wells Fargo believes that greater stability in commodity prices in recent weeks should help inflation rebound in the coming months, with overall CPI reaching 1.9% in the fourth quarter and the core CPI continuing to run above 2.0%.

UNEMPLOYMENT STEADY AT 5%

The unemployment rate remained at 5% in April, but hiring slowed, with employers adding just 160,000 jobs, the fewest in seven months and job gains for March and February were revised lower by a combined 19,000, although they remained healthy at 233,000 and 208,000, respectively. Average hourly pay rose 2.5% in April from a year earlier, above the sluggish 2% annual pace that has been typical for the past six years. Job growth fell sharply in retail, construction and government, and remained weak in manufacturing. Retailers shed 3,100 jobs, down from an average gain of 52,500 in the first three months of the year. Construction hiring slipped to 1,000 from an average gain of 24,000, and government shed 11,000 after adding an average of 16,000 jobs per month in the first quarter. Unseasonably cool weather in the Northeast may have delayed shopping for summer clothes, causing stores to cut workers. Job gains in higher-paid industries, such as management consulting and computer systems, picked up from March. Growth has sagged in the past six months as slower economies overseas and a stronger dollar cut into U.S. exports of factory goods. Low oil and gas prices have also caused energy companies to sharply curtail the construction of new rigs, lowering overall business spending.

DURABLE GOODS ORDERS RISE 0.8%

New orders for durable goods rose 0.8% in March after falling a downwardly revised 3.1% in February. The increase was less than expected as demand for automobiles, computers and electrical goods slumped. Orders for non-defense capital goods excluding aircraft, a category that serves as a proxy for business investment spending, were unchanged after dropping a downwardly revised 2.7% in February. Shipments of core capital goods, which factor into GDP calculations for business spending, rose 0.3% after slipping a downwardly revised 1.8% in February. Over the first three months of the year overall orders for durable goods are up 1.4% compared to the first quarter of 2015. The durable goods report is often both volatile and subject to sharp revisions. Oxford Economics expects that the headwinds that are constraining growth, including the strong dollar, weak foreign demand, bloated inventories and low oil prices, will remain for much of the year and limit real GDP growth this year.

CHICAGO PMI FALLS TO 50.4

The Chicago PMI fell 3.2 points to 50.4 in April after rising to 53.6 in March. The decline was led by a big drop in New Orders and Order Backlogs. Only Production and Supplier Deliveries posted increases for the month. Inventories increased to the highest level since October 2015 but remained in contraction for the sixth consecutive month. Employment retreated back into negative territory after rising to the highest level since April 2015 in March. Chief Economist of MNI Indicators Philip Uglow said the report was a disappointing start to the second quarter.

WHOLESALE PRICES FALL 0.1%

The Producer Price Index (PPI) fell 0.1% in March after falling 0.2% in February and was down 0.1% year-over-year. The core PPI, which excludes food, energy and trade services, fell 0.1% after being unchanged in February and was up 1.0% from March 2015. The overall decline was due to an unexpected 0.2% drop in the price of services, which account for roughly two-thirds of the overall index. It was the first decline in that category since October 2015. Economists had expected the overall PPI to increase. The PPI for inputs to construction rose 0.3% in March after falling 0.1% in February but was down 3.4% from March 2015.

Q1 GDP RISES 0.5%

GDP grew just 0.5% in the first quarter, the weakest pace of growth in two years and slightly below expectations of 0.7% growth. GDP grew 1.4% in the fourth quarter. Consumer spending, which accounts for about 70% of economic activity, grew 1.9% in the first quarter, down from 2.4% in the fourth quarter and the weakest showing in a year. Business investment dropped 5.9%, the biggest quarterly drop since the height of the recession in 2009. The decline was led by a record 86% plunge in the category that covers oil and gas exploration, due to the fact that U.S. energy companies have cut back sharply in response to falling global oil prices. Businesses also responded to weaker spending by ordering fewer goods; inventory grew by $60.9 billion, down from $78.3 billion in the fourth quarter of 2015. However, since the recovery began nearly seven years ago, GDP has been weak in the first quarter of each year, averaging 0.8%, and has then rebounded in the spring, with second quarter growth averaging 3.1%. Economists are expecting a similar pattern this year, forecasting second quarter growth of around 2.8%.

JOB OPENINGS RISE

There were 5.4 million job openings in February, down from 5.5 million in January, according to the latest Job Openings and Labor Turnover Survey, or JOLTS report. Economists had forecast 5.5 million openings. The report also showed that hires increased to 5.4 million, while separations were little changed at 5.1 million. The quits rate was 2.1%, up from January’s 2.0%. In the 12 months through February, the economy created a net 2.7 million jobs, representing 62.1 million hires and 59.4 million separations. Economists say that while the monthly swings in job openings can be wide, the level of openings seems to have stabilized, although it remains extremely high. The Fed regards the rebounding quits rate as an indication that workers are confident about their job opportunities, and increasing hires indicate that businesses are confident about demand forecasts. However, strengthening employment also means the Fed is more open to considering interest rate increases, thus far delayed by global growth concerns. The JOLTS report is one of Fed Chair Janet Yellen’s preferred economic indicators.

FED LEAVES RATES UNCHANGED

The Fed decided to leave the federal funds target rate unchanged at their April FOMC meeting, and plans to continue to evaluate incoming data for greater conviction on where the U.S. economy is headed. The Fed downgraded their assessment of the economy, noting that growth in household spending moderated, and softness in business fixed investment and net exports continued. The Fed highlighted continual improvement in the labor market as well as solid gains in households’ real income. Analysts noted that both acknowledgments indicate that the Fed believes consumer spending growth may pick up and help lead to a rebound of GDP growth in the second quarter. Inflation continues to run below the Fed’s 2% target, and the committee reiterated that they need to see both real and expected progress. Analysts noted that the statement did not remove the possibility of a June rate hike, which may depend on the data over the next two months.

WHY GAS PRICES AREN’T BOOSTING CONSUMER SPENDING

It may take more than one year of low gas prices before consumers start to feel the change is “permanent” and relax about how they use the money they’re saving, according to a recent study by the Federal Reserve Bank of San Francisco that called the expected boost from cheap oil “elusive.” The economic study went on to say that consumers won’t start spending their gas savings until they’re convinced lower prices are here to stay. Meanwhile, they’re saving what they don’t spend at the pump.