Americans Kept Spending in June to End Stronger Second Quarter
The 0.2 percent increase in purchases followed a 0.7 percent May advance, Commerce Department figures showed Monday in Washington. The June gain matched the median forecast of economists in a Bloomberg survey. Incomes climbed 0.4 percent for a third month.
The June gain helped spending increase in the second quarter at a 2.9 percent annualized rate, up from a 1.8 percent pace in the first three months of the year and stronger than the 2 percent average from 2010 through 2014.
Disposable income, or the money remaining after taxes, rose 0.2 percent in June from the prior month after adjusting for inflation. The saving rate climbed to 4.8 percent from 4.6 percent in May.
The data showed that after adjusting for inflation, in order to generate the figures used to calculate gross domestic product, purchases was little changed in June after a 0.4 percent gain in May.
Spending on durable goods, including automobiles, fell 1.1 percent in June after adjusting for inflation, following a 1.3 percent jump in May, according to Monday’s report.
Purchases of non-durable goods, which include gasoline, were little changed, while outlays on services advanced 0.2 percent.
The report also showed the price index tied to consumer spending increased 0.2 percent in June from the prior month. It rose 0.3 percent from June 2014. This inflation gauge is preferred by Federal Reserve policy makers and it hasn’t reached their 2 percent goal since April 2012.
Stripping out the volatile food and energy categories, the price measure climbed 0.1 percent from May and rose 1.3 percent in the 12 months ended in June.
Real disposable income per capita is up 1.2% annualized so far this year.
U.S. Employment Cost Index Increase Weakens to Record Low
The employment cost index for civilian workers improved 0.2% in Q2’15 (2.0% y/y), following an unrevised 0.7% Q1 rise. This Q2 performance was the weakest on record and the number fell short of expectations for a 0.6% rise according to the Action Economics Forecast Survey. The ECI for private industry workers remained unchanged (1.9% y/y) following a 0.7% increase. This also was record quarterly weakness.
There was considerable variation in compensation among industry groups in Q2. A 3.6% decline (-2.0% y/y) in information services and a 1.2% shortfall (+1.4% y/y) in professional and business services led the weakness in compensation. Elsewhere, compensation continued to rise at a moderate pace. Manufacturing compensation increased 0.7% (2.5% y/y) and construction workers’ compensation also rose 0.7% (2.1% y/y). Leisure & hospitality workers compensation rose 0.6% (2.4% y/y) and financial activities compensation improved 0.6% (2.3% y/y). The trade, transportation and utilities group realized a 0.6% compensation gain (2.4% y/y) but educational services compensation improved just 0.4% (1.9% y/y).
A 0.1% uptick (1.7% y/y) in benefits was the focus of last quarter’s weakness in compensation. It was driven by a 0.2% decline (+1.3% y/y) in private industry benefits, dragged down by a 0.4% drop (+1.1% y/y) in service industries. Benefits of natural resource, construction & maintenance workers declined 0.7% (+0.7 y/y) while benefits of management & professional workers fell 0.6% (+1.2% y/y). Goods producing industries benefits rose an improved 0.6% (2.3% y/y) and factory sector benefits also rose 0.6% (2.8% y/y).
Wages & salaries of civilian workers rose 0.2% (2.1% y/y) and private industry wages also gained 0.2% (2.1% y/y). Leisure & hospitality wages improved a strong 0.7%, lifting the y/y increase to 2.6% and up from 0.9% during all of 2013. Information sector wages increased a stable 0.6% (1.8% y/y) and financial industry wages gained 0.2% (2.4% y/y). These gains were offset by a 1.3% decline (+1.6% y/y) in professional & business services. Construction sector wages rose 0.8%, lifting the y/y increase 2.4%, up from 0.8% in 2010. Factory sector wages gained 0.7% and the 2.4% y/y rise was improved from 1.4% in 2009.
Total compensation for state & local government workers rose 0.6% (2.3% y/y) in Q2. Education workers compensation gained a steady 0.6% (2.3% y/y) while health care and social assistance comp rose 0.3% (2.2% y/y).
THE FED DEBATE
From Jon Hilsenrath:
GDP Data Support a Soon-and-Slow Rate Hike Strategy
U.S. gross domestic product numbers released Thursday conform to the Federal Reserve’s view that the economy stabilized after a disappointing first quarter, and thus likely keeps the central bank on a path to raise short-term interest rates as early as September.
The report makes it more likely that the Fed’s growth forecasts will hold up for 2015. With the Commerce Department’s upward revisions to first quarter output, the economy needs to grow at a 2.3% pace in the second half of the year to reach the Fed’s projection of 1.9% growth for the year as a whole, said Roberto Perli, an economist at research firm Cornerstone Macro. (…)
How should the Fed respond to an economy with low growth potential? Mr. Perli said it supports the view that the Fed might want to start raising interest rates soon—to prevent inflation pressures from building as slack recedes — but then proceed at a very slow pace because a slow-growing economy can’t bear very high rates.
“Because potential growth is lower than normal, you proceed at a pace that is lower than normal and you stop (raising rates) sooner,†he said.
More Hilsenrath:
FED DOESN’T DEMAND WAGE GROWTH BEFORE INCREASING INTEREST RATE
Federal Reserve officials have fuzzy views on how wage growth fits in with their objectives for the economy. They would like to see wages growing faster. It would give them confidence that the economy is closer to their dual goals of producing healthy job growth and modestly rising inflation. But the linkages between wages, jobs and inflation are unclear, and so they’re not banking on faster wage growth materializing.
In classical models of the economy, as the unemployment rate falls, slack in the job market diminishes, producing upward pressure on wages. Because wages are such a large component of business costs, wage pressures in turn get passed on to consumers in the form of higher consumer prices. But a growing body of research suggests the economy hasn’t been working like this for decades. Other factors — including global pressures, in addition to household and business views about the stability of inflation — have large effects that potentially outweigh any impact from domestic wages on prices.
A recent paper by Fed board economists Ekaterina Peneva and Jeremy Rudd finds little evidence that the ups and downs of wages had large effects on broader consumer price trends either before or after the 2007-2009 recession. “Wage developments are unlikely to be an important independent driver of (or an especially good guide to) future price developments,†they conclude. (…)
Ms. Yellen said explicitly in that March speech that she is prepared to start moving interest rates up even before she sees sure signs that wages are rising faster. “That said,†she added, “I would be uncomfortable raising the federal funds rate if readings on wage growth, core consumer prices, and other indicators of underlying inflation pressures were to weaken.â€
Given her stance, Friday’s employment cost report doesn’t look like a deal breaker for the Fed in its long-running debate about when to raise short-term interest rates. Wages appear to be stagnant but not clearly weakening, which is what she set out as her threshold for not acting. Still, it creates new doubts for officials and doesn’t help them build the confidence they’re hoping to build that the job market is nearing full employment and inflation rising toward 2%.
David Rosenberg has a different view:
(…) we have real GDP growth of 2.3% YoY which is slower than the 2.6% pace of a year ago and the 2.5% trend two years ago that ultimately touched off Operation Twist and then QE3.
When the Fed moved off 1% in 2004, growth was 4.2% YoY.
When the Fed started to retighten after the Asian crisis in 1999, growth was 4.6% YoY.
When the Fed began what proved to be an aborted rates cycle in 1997, growth was 4.3% YoY.
When the Fed began its aggressive cycle in 1994, growth was 3.4% YoY an its way for 3 quarters of 4%-plus performances.
When the Fed reloaded the gun after the 1987 stock market collapse failed to dent the economy, growth was 4.3% YoY.
This is the slowest trend in five quarters and only 10 other quarters in this expansion have been this soft. This is what should get the Fed excited? Seriously?
Average out the first half of the year and we get 1.5% real GDP growth – in the January-to-June period a year ago, the pace was 1.8%.
So this year goes down as tied for the second worst first-half showing (tied with 2011) since the recession ended.
How can anyone be impressed with that, all the more so a “data dependent†Fed? (…)
The Fed generally starts when there is visible acceleration – we’re doing okay, but not quite good enough yet. The level of the fed funds rate is immaterial. The issue is what the level is doing to ignite growth, and let’s face facts – the data are simply not strong enough.
Plus the U.S. dollar’s sharp ascent of the past year has been equivalent to 200 basis points of cumulative rate hikes – just because this stylized fact receives scnat attention doesn’t mean it’s not important. (…)
The U.S. dollar’s strength represents a form of monetary tightening and a budget deficit down to seven-year lows because the government’s tax-take (+9% YoY) runs more than double the spending trend (+4%) represents a form of fiscal tightening. Iâ€m not so sure the economy need Fed rates tightening on top of all that. (…)
To start hiking with growth this lukewarm (2-handle), core PCE inflation this low (1% plus), an output gap of around 2%, and adjusted unemployment rate close to 9%, a runaway dollar and an epic slide in commodity prices…would be a tad premature in my view. (…)
Keep in mind that while employment is obviously up, the number of full-time jobs today is 0.7% or some 822,00 lower than it was at the pre-recession peak. That was eight years ago! (…)
Stepped-up job creation that is not coupled with confidence over the future isnt’ really all that impressive and I say that because at the same time that claims are testing three-decade lows, the Bloomberg consumer sentiment index in the July 26th fell completely out of bed – sagging to 40.5 from 42.4 in what was the largest decline in five months.
Tyler Hay, CEO of Evergreen/Gavekal:
(…) this has to be the most anticipated rate hike in the history of mankind. During this wait-and-see period something unexpected happened. What occurred was a massive rally in the dollar versus most other major currencies. This effect, though unintended, may serve as a more drastic de facto rate increase. While some point to the oil decline as an offset to a stronger dollar, recent earnings seem to suggest the dollar is hurting more than oil is helping. Whether the Fed itself sees it this way as well could be evidenced by further postponing their intended rate hiking campaign into 2016.
Worth Wray, also at Evergreen/Gavekal:
(…) The risk of a LTCM-style blowback is very real in a world where, until recently, China has artificially supported commodity demand, central banks have suppressed the cost of capital for the longest time on record, and a herd of largely passive investors has overstayed its welcome in emerging markets. We don’t need to see a sudden financial shock to push the global financial system over the edge. We just need to see a very predictable (and self-reinforcing) spike in the US dollar (USD). That’s it. The dominos are all lined up and the US dollar breeze is turning into a gale force wind as the Fed signals that it could hike its target for the federal funds rate as soon September 2015.
I’m not saying that increasingly fragile emerging markets will be the cause of the next global financial crisis; but the Federal Reserve’s cavalier attitude and stark refusal to extend life-lines to fragile EMs underscores the real possibility that Ms. Yellen may soon lose control.
I know it’s hard to miss out on returns when it appears that the big risks, like a disorderly Grexit, have receded for the time being. I know it’s painful to suffer through meager yields in a ZIRP/Negative Interest Rate Policy (NIRP) world. But in a world where everything is expensive, where liquidity can evaporate in a single trading session, and where correlations between traditionally uncorrelated asset classes can break down without warning, our best defenses against the rising risk of a macro accident are: (1) diversification, (2) cash, (3) knowledge, and (4) the discipline to act on that knowledge rather than emotion. Eventually, defensively postured portfolios will yield enormous dividends as investors who keep their powder dry will have the opportunity to buy valuable assets at prices close to those seen during the global financial crisis.
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Fed’s Bullard: ‘In Good Shape’ to Raise Rates in September St. Louis Fed president says GDP data cleared away worries over outlook
(…) Mr. Bullard shrugged off a report Friday showing surprising tepid wage gains, saying he isn’t that worried about that situation right now. (…)
The negative first quarter was a “pretty serious†issue for the Fed and a clear reason to hold off on rate rises, Mr. Bullard explained. “We had to get that behind us before we could get to the first rate rise. It is behind us and the outlook remains fairly good for the economy.†(…)
But Mr. Bullard, how about inflation?
The Treasury market’s implied forecast of what inflation will average over the next five years — calculated from the simple difference between yields on the five-year Treasury and the five-year Treasury inflation-protected security — finished out July at 1.36%. That compared with the 1.61% the so-called five-year breakeven rate held at the end of June, and brought it to levels last seen in March.
A bunch of things happened last month to bring the inflation forecast lower. Crude oil and many other commodities fell sharply. The dollar strengthened. Layer in worries that China’s stock market woes hurt its economy as well as scant signs that U.S. wage gains are accelerating, and you can see why investors might be looking for less in the way of inflation in the years ahead.
For the Federal Reserve policymakers, this poses a problem. One of their criteria for a rate increase is confidence that inflation is moving toward their 2% target. That certainly seems to be lacking now.
The YoY core PCE deflator has been stable at 1.3% since January. (Chart from Doug Short)
Falling oil price hits big energy groups Poor results in US follow huge job cut announcements in Europe
As Exxon, the US giant seen as best insulated from the crude price crash, reported its worst quarterly profits since 2009, its main US competitor Chevron suffered a huge $2.2bn loss in exploration and production in the three months to June 30.
For the first time, the biggest and strongest industry operators are feeling the full effect of a plunge in Brent crude since last summer that has led to an estimated 70,000 job losses worldwide and caused some $200bn of spending on major new oil and gas projects to be shelved. (…)
Royal Dutch Shell and Centrica this week announced that they were shedding more than 12,000 jobs between them. Shell cut capital spending 20 per cent, with its chief Ben van Beurden warning of a “prolonged downturn†ahead. (…)
Trans-Pacific Partnership Talks End With No Deal High-level efforts to complete a major Pacific trade agreement ended without resolution amid deep differences over trade in dairy and other products.
Officials in a statement said they made “significant progress†and would work further on a deal, without specifying a future meeting.
“The sad thing is, it’s 98% concluded,†Australia’s trade minister, Andrew Robb, said as ministers prepared to leave on Friday.
U.S. and Canadian officials have quarreled in recent months about ways to use the agreement to open up Canada’s highly protected dairy industry, but the public dispute this week spread to three of the other developed economies negotiating the agreement—Australia, Japan and New Zealand.
“We can see clearly that there are one or two really hard issues, and one of them is dairy,†New Zealand’s trade minister, Tim Groser, said at a news conference Friday.
The gap over dairy, as well as disagreements about trade in automobiles, hindered the efforts of ministers to reach an accord on other issues, such as labor rules and the level of intellectual-property protection for pharmaceuticals, a priority for Washington. (…)
China’s Stocks Fall to Three-Week Low on Economic Growth Concern
China’s Latest Warning to Equity Investors: No Big Sell Orders
EARNINGS WATCH
Factset’s account:
With 71% of the companies [354 companies] in the S&P 500 reporting actual results for Q2 to date, the percentage of companies reporting actual EPS above estimates (73%) is equal to the 5-year average, while the percentage of companies reporting actual sales above estimates (52%) is below the 5-year average.
In aggregate, companies are reporting earnings that are 4.4% above expectations. This surprise percentage is slightly below the 1-year (+4.5%) average and also below the 5-year (+5.0%) average.
Due to companies beating earnings estimates in aggregate, the blended (combines actual results for companies that have reported and estimated results for companies yet to report) earnings decline for Q2 2015 is now -1.3% [-2.3% last week]. This is a smaller decline than the estimate of- 4.6% at the end of the second quarter (June 30).
If the Energy sector is excluded, the blended earnings growth rate for the S&P 500 would jump to 5.4% from -1.3%. [This is much better than last week’s +4.1%.]
In aggregate, companies are reporting sales that are 1.0% above expectations. This surprise percentage is above the 1-year (+0.9%) average and above the 5-year (+0.7%) average.
Due to companies beating revenue estimates in aggregate, the blended revenue decline for Q2 2015 is now -3.3%. This is also a smaller decline than the estimate of -4.4% at the end of the second quarter (June 30).
If the Energy sector is excluded, the blended revenue growth rate for the S&P 500 would jump to 1.8% from -3.3%, unchanged from last week.
More on this later this week…
Carlyle Fund Walloped in Commodities Rout A rout in raw materials has helped drive down holdings in a Carlye Group firm’s flagship fund from about $2 billion to less than $50 million. The collapsing commodities market is spreading pain well beyond specialists to some of the heaviest hitters on Wall Street.
The firm, Vermillion Asset Management LLC, suffered steep losses and a wave of client redemptions in its commodity fund after a string of bad bets, including one tied to the price of shipping of dry goods, such as iron ore, coal or grains. At one point, two of Carlyle’s co-founders, David Rubenstein and William Conway, put tens of millions of dollars of their own money in the fund and left it in amid the losses and redemptions, according to people familiar with the matter. (…)
This week alone, commodity-trading firms Armajaro Asset Management LLP and Black River Asset Management LLC, a unit of agricultural conglomerate Cargill Inc., said they are closing funds. Several other firms that managed billions of dollars already have closed their doors, including London-based Clive Capital LLP and BlueGold Capital Management LLP. Large money managers including Brevan Howard Asset Management LLP and Fortress Investment Group LLC have wound down commodity strategies. (…)