Economists’ Forecast: Here We Grow Again WSJ Survey: Forecasters expect the U.S. economy contracted during the first quarter, much like 2014. They expect a rebound during the rest of the year, much like 2014.
(…) the panel, on average, sees annualized economic growth of 2.8% in the second quarter, supported by stronger job gains and wage growth.
They also see the drag from weak trade and a strong dollar dissipating by the second half, delivering average economic growth at a 3% pace.
The survey of 62 economists, not all of whom answered every question, showed a widespread expectation that consumers would start spending again after several months of avoiding the mall. (…)
The economists’ first-quarter rethink brought down the forecast for all of 2015 to 2.2% from 2.7% expected in the April survey. That means growth for all of 2015 is expected to be another disappointment, falling below 2014’s 2.4% rate instead of eclipsing it as many economists originally expected. (…)
In the May survey, 73% of the economists said the first rate increase will be announced at the Fed’s September meeting. That’s up considerably from the 19% who expected that in the January survey.
Less than 7% of panelists now expect a June rate rise versus 50% who thought that in January.
The U.S. Economy Just Had Its Worst Month Since the Recession The U.S. economy in March contracted at the worst pace since the financial crisis, a private-sector gauge showed.
(…) Macroeconomic Advisers on Thursday said its monthly estimate showed GDP fell an inflation-adjusted 1% in March, the largest drop since December 2008, “when the U.S. economy was in the throes of recession,” the firm said. Monthly GDP had climbed 0.3% in February and ticked up 0.1% in January after falling 0.4% in December, the firm said.
The key reason not to worry too much: The contraction reflected a drop in net exports related to the resolution of a labor dispute at West Coast ports, the firm said.
“Because the decline in monthly GDP was driven by a surge in imports that was probably unrelated to current production, we are suspicious of it and believe it overstates the underlying weakness in the economy,” Macroeconomic Advisers said in a note to clients.
Let’s pray there was indeed an overstatement. Question is: how much?
(…) That means forecasters can’t necessarily count on a rebound in the latter part of the year, the Fed economists say.
“With a second year in a row of unusually weak first-quarter growth, some analysts have argued that there may be residual seasonality in the GDP data, that is, a predictable seasonal pattern remains in the published data,” they write in a research note.
“This argument implies that there is predictable weakness in first-quarter GDP growth that will be followed by predictable strength in the subsequent three quarters of the year,” the authors add. “Our analysis here does not find convincing evidence of material residual seasonality in GDP in recent years.”
The findings run counter to recent research from the Philadelphia Fed, which found economists could do a better job at making seasonal adjustments to avoid uncharacteristic winter-quarter weakness.
Instead, the Fed board researchers find “no firm evidence” that the soft start to economic growth in 2015 “primarily reflects residual seasonality.”
U.S. Producer Prices Fall 0.4% Latest sign of persistently low inflation across the economy
Core prices, which exclude volatile food and energy categories, fell 0.2%. When excluding food, energy and trade services, the index rose 0.1%.
Economists surveyed by The Wall Street Journal had expected both overall and core prices would increase 0.1%.
The monthly gauge is now down in five of the past six months. From a year earlier, overall producer prices have dropped 1.3%, and core prices are up 0.8%. (…)
The price index for intermediate demand, which tracks costs of products used as inputs for production, fell 1.1% in April, its ninth straight decline, and was down 7.8% from a year earlier, the biggest drop since September 2009.
The PPI for Final Demand Goods ex-Food, ex-Energy declined 0.1% last month after rising 0.2% in March, the only up month since September 2014. During the last 7 months, this price index for U.S. produced core goods has declined at a 0.7% annualized rate. Another index, Personal Consumption Goods less Energy, which measures prices for finished consumer goods, has dropped at a 2.4% annual rate in the last 3 months. Haver Analytics’ chart shows that services prices are also slowing.
We know that import prices have been weak since last fall. They could have been even weaker:
After Western Port Settlement, the Deluge — of Cheap Imports
(…) As a backlog of cheap imported goods arrives on store shelves, consumer price pressures may weaken again.
(…) goods prices unexpectedly started to firm in the first quarter, just when they should have been weakening further. In fact, core goods prices outpaced core service prices in both February and March.
The third line in the chart, which denotes the supplier deliveries subcomponent of the manufacturing ISM survey, may explain why this occurred. The supplier deliveries series rises when delivery times increase. This is based on the assumption that a fast-growing economy tends to be plagued by bottlenecks and delays, whereas turnaround times shorten as capacity is idled in a slower growth scenario.
The sizeable increase in delivery times early this year coincided closely with the timing of the port dispute, and the resulting shortage of imported goods reduced the incentive for retailers to lower prices in order to move inventory (with a modest lag). Thus, the port bottleneck also halted at least some of the transition mechanism from the stronger dollar.
Goods Prices Accelerated as Port Backlogs Increased
Falling Import Prices Passing Through to Wholesale Inflation
Now that the ports are working through their backlogs, cheap imported goods are arriving on store shelves (again with a modest lag). This was evident in the latest data on import prices, which fell further, as well as the April PPI data, which missed consensus expectations in both the headline and core. With the usual lag, this price weakness is likely to materialize in the CPI over the next few months. That risks eroding the recent, modest reacceleration in the core from 1.6 percent (year on year) as of year-end 2014 to 1.8 percent as reported in March.
If this occurs, it could reduce policy makers’ confidence that inflation is indeed drifting back toward their target — and at the margin it gives them the luxury of waiting a bit longer to initiate liftoff.
PBOC Says No Need for QE Despite More Pressure on Economy China is likely to shy away from aggressive stimulus to revitalize its slowing economy
China’s economy faces downward pressure in the short term, but there is no need to use quantitative easing to aggressively boost liquidity, the nation’s central bank said Friday.
The People’s Bank of China in its first-quarter monetary-policy report said mounting levels of debt have limited Beijing’s ability to use government-led investment to stimulate the economy. (…)
The central bank in its latest monetary-policy report reiterated it would continue its prudent monetary policy, maintain appropriate liquidity levels and keep credit growth steady.
It also said the domestic liquidity condition was affected by a stronger U.S. dollar drawing capital out of the country. (…)
The PBOC said in the report the country’s first-quarter growth was within a reasonable range and price levels were likely to remain low. (…)
US oil chief vows shale will bounce back Continental Resources’ chief reacts to ‘gloating’ Saudis
One of the leading figures of the US shale revolution insisted the slowdown in US shale was a temporary phenomenon, rejecting claims by Saudi Arabia that it is succeeding in squeezing American oil producers.
Harold Hamm, chief executive of Continental Resources, said he disagreed with claims by a Saudi official, reported in the Financial Times , that the lower oil price had deterred investment in higher-cost sources of oil such as shale.
He also argued that the Saudi comments would likely strengthen political support in the US for a relaxation of the country’s decades-old ban on crude oil exports. (…)
In his interview with the FT, Mr Hamm reiterated his view that a WTI price of about $70 per barrel, up from about $61 today, would be enough to stimulate increased activity and production growth. (…)
Bond yields challenge US stock valuations Ageing equity bull run requires revenue boost
(…) “What has been scary about the last couple of weeks is that rates have been rising without a clear improvement in the economy,” Mr Koesterich says. “That is a much more dangerous environment for stocks.”
1 thought on “NEW$ & VIEW$ (15 MAY 2015): Deflation not dead; No Chinese QE.”
This note needs more analysis: “Because the decline in monthly GDP was driven by a surge in imports that was probably unrelated to current production, we are suspicious of it and believe it overstates the underlying weakness in the economy,” Macroeconomic Advisers said in a note to clients.
1. A huge portion of the volume of US West Coast exports are things like scrap metal, hay, scrap paper/cardboard, and air (empty containers); as well as other low-value products. It is unlikely the lower export numbers had a significant contribution to the higher net import numbers.
2. Shipments originally destined for US West Coast ports in February that were re-routed would have shown up in a lagging manner, serving to ratchet up some March import numbers because of February diversions and adjustments to the slowdowns on the US West Coast. The normal March import arrivals were likely routed to avoid the US West Coast tie-ups, so double shipments were showing up in many instances in March.
3. Low grain prices are really dropping the value of agricultural exports. Exporting corn at $3.75/bushel
instead of $6.00 bushel is a big difference. The same goes for soybeans and wheat, which have
been pounded in price the past year. Even pork, which was going for $1.30/ live lb. last summer
was down to nearly half that recently.
The deflation in the value of our exports in addition to the re-routing of our imports due to the port slowdown this winter likely had much to do with the larger March net import numbers. Sure, imports are moving up due to the stronger dollar, but it’s also hitting the value of exports, which need to more competitive for the same reason.
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