Q2 BOUNCE WATCH
U.S. Consumers Remain Wary U.S. consumer spending was little changed in April, the latest sign of caution among American households.
Personal spending, which measures purchases of everything from home appliances to haircuts, decreased less than 0.1% from the prior month on a seasonally adjusted basis, the Commerce Department said Monday. Spending rose a revised 0.5% in March, compared with the initially reported 0.4%.
Personal income, which measures money received from various sources including wages and government assistance programs, climbed 0.4% in April from the prior month.
Disposable income, or the money left over after taxes, rose 0.3 percent after adjusting for inflation. It fell 0.2 percent in the prior month.
Wages and salaries climbed 0.2 percent.
Monday’s report showed spending on services increased 0.2% in April from the prior month, but spending on goods fell 0.5%.
When adjusted for inflation, overall consumer spending was flat in April.
U.S. households appear more inclined to save rather than splurge in recent months. The personal saving rate rose in April to 5.6% from 5.2% the prior month.
The personal consumption expenditures price index, which is the central bank’s preferred inflation gauge, rose 0.1% in April from a year earlier, the smallest increase since October 2009.
Excluding the volatile food and energy categories, prices climbed 1.2% in April from a year earlier. (Charts from Zerohedge)
On Tuesday, auto makers are expected to report May sales, and analysts are forecasting 1.59 million vehicles for the month. While that would be down about 1% from the same month last year, the result would still put the auto sales on pace for a seasonally adjusted annual rate of 17.3 million vehicles, based on the first five months of the year, according to market researcher Kelley Blue Book. An improving economy and Memorial Day deals are helping offset the recent uptick in gasoline prices, say auto analysts.
Most major manufacturers are expected to post slight declines in volume due to one less selling day for the month this year.
U.S. construction spending jumps to near six-and-a-half year high U.S. construction spending surged in April to the highest level in nearly 6-1/2 years as outlays increased broadly, pointing to some pockets of strength in the economy.
Construction spending jumped 2.2 percent to an annual rate of $1.0 trillion, the highest level since November 2008, the Commerce Department said on Monday. The percent increase was the largest since May 2012.
March’s outlays were revised to show a 0.5 percent increase instead of the previously reported 0.6 percent fall.
In April, construction spending was buoyed by a 1.8 percent increase in private construction spending to the highest level since October 2008. Outlays on private residential construction rose 0.6 percent and spending on private non-residential construction projects jumped 3.1 percent to a six-year high.
Public construction outlays soared 3.3 percent as spending on state and local government projects – the largest portion of the public sector segment – offset a 3.6 percent decline in federal government outlays.
HSBC fears world recession with no lifeboats left The world authorities have run out of ammunition as rates remain stuck at zero. They have no margin for error as economy falters
The world economy is disturbingly close to stall speed. The United Nationshas cut its global growth forecast for this year to 2.8pc, the latest of the multinational bodies to retreat.
We are not yet in the danger zone but this pace is only slightly above the 2.5pc rate that used to be regarded as a recession for the international system as a whole.
It leaves a thin safety buffer against any economic shock – most potently if China abandons its crawling dollar peg and resorts to ‘beggar-thy-neighbour’ policies, transmitting a further deflationary shock across the global economy. (…)
Stephen King from HSBC warns that the global authorities have alarmingly few tools to combat the next crunch, given that interest rates are already zero across most of the developed world, debts levels are at or near record highs, and there is little scope for fiscal stimulus.
“The world economy is sailing across the ocean without any lifeboats to use in case of emergency,” he said. (…)
The authorities are normally able to replenish their ammunition as recovery gathers steam. This time they are faced with a chronic low-growth malaise – partly due to a global ‘savings glut’, and increasingly to a slow ageing crisis across most of the Northern hemisphere. The Fed keeps having to defer its first rate rise as expectations fall short.
Each of the past four US recoveries has been weaker than the last one. The average growth rate has fallen from 4.5pc in the early 1980s to nearer 2pc this time. The US fiscal deficit has dropped to 2.8pc but is expected to climb again as pension and health care costs bite, even if the economy does well. (…)
The great hope – and most likely outcome – is that the recent monetary expansion in the US and the eurozone starts to gain traction later this year. Broad ‘M3’ money data – a one-year advance indicator – has been growing briskly on both sides of the Atlantic. But nobody knows for sure whether the normal monetary mechanisms are working. (…)
It is now more likely than not that US economy has dropped through the Fed’s stall-speed threshold of two consecutive quarters below 2pc growth. Exactly how far below is unclear. The Fed uses its own growth measure – gross domestic income (GDI) – and this data has not yet been published.
The stall speed concept is soft science but not to be ignored. “Output tends to transition to a slow-growth phase at the end of expansions,” said a Fed research paper.
Much now depends on China, where the economy is starting to look “Japanese”. Dario Perkins from Lombard Street Research says the Chinese economy is in a much deeper downturn than admitted so far by the authorities. It probably contracted outright in the first quarter.
Electricity use has turned negative. Rail freight has been falling at near double-digit rates. What began as a deliberate move by Beijing to choke off a credit bubble has taken on a life of its own, evolving into a primordial balance-sheet purge. (…)
Mr Perkins said China is now in a “classic debt deflation spiral” as excess capacity holds down prices. Factory gate inflation is now minus 4.6pc. This in turn is tightening the noose further by pushing up real borrowing costs.
The Chinese authorities have so far resisted the temptation to flood the system with fresh stimulus, fearing that this would store up even greater trouble.
They have taken steps to offset a clampdown on local government spending and avert a “fiscal cliff” that might otherwise have occurred. They have loosened policy for banks just enough to offset the contractionary effects of capital flight. But they have not yet come to the rescue.
This matters enormously. Andrew Roberts from RBS says China accounted for 85pc of all global growth in 2012, 54pc in 2013, and 30pc in 2014. This is likely to fall to 24pc this year. “If there is only one statistic that you need to know in the world right now, this is it,” he said.
The effects are being felt across Asia. Japan keeps disappointing. Its exports to China have fallen 15pc over the last year. Korea is flirting with recession.
Russia, Brazil, Argentina, and Venezuela are all contracting sharply, casualties of the China-driven commodity bust. The UN says the growth rate for the emerging market nexus (ex-China) has dropped to 2.3pc from an average of 6.5pc in the glory years of 2004-2007.
Europe is doing better but it is hardly a boom. The eurozone is contributing little to global demand. The region has displaced China and to become the world’s “saver of last resort” – or its biggest black hole in the view of critics – exploiting the weaker euro to rack up a current account surplus of $358bn.
It is far from clear whether Europe can act as an engine of world recovery. The composite purchasing managers index (PMI) for services and manufacturing slipped in May, and new orders fell. Oxford Economics thinks the “sugar rush” from quantitative easing may be wearing off.
HSBC’s Mr King says the global authorities face awful choices if the world economy hits the reefs in its current condition. The last resort may have to be “helicopter money”, a radically different form of QE that injects money directly into the veins of economy by funding government spending.
It is a Rubicon that no central bank wishes to cross, though the Bank of Japan is already in up to the knees.
The imperative is to avoid any premature tightening or policy error that could crystallize the danger. As Mr King puts it acidly. “Many – including the owner of the Titanic – thought it was unsinkable: its designer, however, was quick to point out that ‘She is made of iron, sir, I assure you she can’.”