Slowing U.S. Growth Muddles Fed Plans The Fed pointed to cooling economic activity and reduced job-market gains in its latest policy statement, underscoring uncertainty about when the economy will rebound and clouding the timing interest-rate increases.
“Economic growth slowed during the winter months, in part reflecting transitory factors,” the Fed said. (…)
The 0.2 percent rise in first-quarter GDP reported yesterday by the Commerce Department fell short of forecasters’ already-soft projections of 1.0 percent. This bears a striking resemblance to 2014, when forecasters anticipated a 1.2 percent expansion in the first three months but the initial print was 0.1 percent. Ultimately, it was revised down to negative 2.1 percent.
Since 2010, first-quarter GDP growth has averaged 0.6% while all other quarters 2.9%. That stop-and-start pattern has forced Fed officials to regularly second-guess their own economic forecasts.
Doug Short once again has the best charts:
While backward looking, this breakdown is instructive. Spending on goods has been exceptionally weak which left manufacturers with excess inventories which will need to be depleted before production resumes. Given weak exports, U.S.manufacturing could remain weak for a while, unless consumer spending bounces back.
Markit echoes what most economists are currently saying:
However, there is plenty of evidence to suggest that the first quarter slowdown represents a temporary blip, and that growth will rebound in the second quarter.
Most importantly, the first quarter saw business disrupted by extreme weather hitting parts of the country. West Coast port closures also hit trade and manufacturing supply chains.
Some of the ‘hard’ official data for March are also hinting at a rebound. Retail sales rose for the first time in four months, manufacturing output edged higher for the first time since November and durable goods orders jumped 4.0%.
The survey data are likewise showing signs of growth having picked up compared to earlier in the year. Markit’s US PMI surveys collectively signalled the strongest pace of economic growth for seven months in March, and preliminary ‘flash’ data for April signalled a robust pace of expansion being sustained at the start of the second quarter.
It’s not just businesses that are brushing off slowdown fears. Consumer confidence surveys remain at, or near, post-recession highs, suggesting that consumer spending will revive after growing at the slowest pace for a year in the first quarter, providing an important boost to the economy in the second quarter. (Moody’s)
Supporting this, private investment outside of the oil and gas industry hummed along nicely in Q1. A particularly encouraging sign is the sharp increase in investment in computer software and research and development, which boosted growth more than at any time in the past 60 years after the late 1990s. (FT)
Not to kill hopes entirely but maybe curb one’s enthusiasm:
The Fed acknowledged that the pace of job gains has moderated, growth in household spending declined and business investment softened.
The facts over the last 3 months are pretty soft (at annual rates):
- U.S. IP –3.7%
- Retail sales –1.6%
- Housing starts –46.2%
- Building Permits –7.7%
- Core capex orders –7.3%
- Exports –19.8%
Also, Evercore ISI Company Surveys do not point to a strong April.
Unless oil prices recover to the $75 range, oil and gas investments will continue to decline. Also, imports rose 1.8% following a 10.4% increase in Q4. The growth rate would have probably been larger were it not for West Coast port disruptions. Watch for imports to accelerate in the current quarter, cutting into GDP.
Fortunately, housing seems to want to start to contribute:
U.S. Mortgage Applications Hint at Higher April Home Sales
Mortgage Bankers Association mortgage applications data provides more hope for housing in 2015. This volatile index declined 2.3 percent last week, but the longer-term trend is more important — and more encouraging.
The monthly average rose more than 6 percent from the period before and is up about 29 percent from a year earlier.
The MBA’s purchase-only index (excluding refinancings) provides a cleaner read on mortgages that support housing demand. The monthly moving average has risen nearly 14 percent in both monthly and yearly comparisons.
Home sales figures for April won’t come out for another few weeks. March existing home sales advanced more than 6 percent, accelerating to an annualized rate of 5.2 million units from 4.9 million units. This partially offset the 11.4 percent drop in new home sales to an annual pace of 481,000 from 543,000. The rise in purchase-mortgage applications suggests an April pickup in transactions is in store.
So far, home sales have outstripped a rise in purchase-mortgage applications and have not been linked to any recovery in total mortgage debt outstanding. That implies households have not been overleveraging to make the purchase.
BTW:
U.S. Pending Home Sales Index Rises
The National Association of Realtors said Wednesday its pending home sales index, which is based on contract signings for purchases of previously owned homes, increased 1.1% to a seasonally adjusted level of 108.6 in March from an upwardly revised reading of 107.4 in February.
The index rose 11.1% in March from a year earlier.
The Northeast continues to severely lag with pending sales down 5.5% in Q1 and up only 0.6% YoY.
German Labor Market Extends Recovery
German unemployment declined for a seventh month in April as companies became more confident that the recovery in Europe’s largest economy is here to stay.
Joblessness fell a seasonally adjusted 8,000 to 2.79 million, the Federal Labor Agency in Nuremberg said on Thursday. Economists had predicted a drop of 15,000. The unemployment rate remained at 6.4 percent, the lowest level since reunification.
CHINA
China’s March Macro-economic Climate Indices all showed weakness for the month, but the drop in the Business Cycle Signal really caught our attention. The lowest reading during the financial crisis was 74.7, in Jan 2009, but BCS now reads 65.3. We are concerned. (ISI)
Bank of Japan Cuts Price Outlook Japan’s central bank cut its outlook for prices but leaves policy unchanged, despite continuing speculation over further easing action.
(…) It said the inflation rate in the current fiscal year that started in April would likely be 0.8%, compared with a 1% forecast made in January. It said there was “considerable uncertainty” in the inflation outlook.
Russia Cuts Interest Rates The Bank of Russia cut interest rates for the third time this year and said it was ready to ease monetary policy further in the latest sign that the Russian economy is steadying.
The central bank cut its key rate by 1.5 percentage points to 12.5% and said it would cut rates further as inflation slows.
The WSJ headliner implying the Russian economy is steadying does not jibe with the Russian central bank statement:
According to Bank of Russia estimates, the labour market adjusts to the new conditions mostly through wage decrease and part-time employment. These factors, alongside with a decrease in retail lending, will result in further decline in consumer activity. Fixed capital investments will continue to contract due to persistently high economic uncertainty, deterioration of companies’ financial performance, tighter lending conditions, limited ability to replace foreign sources of funding with domestic ones given shallow Russian financial market, as well as high prices for imported investment goods. Sluggish domestic demand will contain imports. Net exports will be the only factor to make a positive contribution to the output growth. These factors will lead to a fall in GDP in 2015. Later on, as import substitution expands, sources of funding gradually diversify, lending conditions ease, and oil prices rise to some extent, the quarter-on-quarter GDP growth is expected to recover.
Brazil raises rates to highest level in 6 years
The country’s central bank raised the benchmark Selic rate late on Wednesday by an expected 50 basis points to 13.25 per cent — the highest level since January 2009.
EARNINGS WATCH
- 292 companies (67.1% of the S&P 500’s market cap) have reported. Earnings are beating by 6.1% while revenues have missed by -0.3%.
- Expectations are for revenue, earnings, and EPS of -3.3%, -0.8%, and +0.9%. Excluding Energy, growth would be 2.3%, 7.4%, and 9.4%, respectively. This excludes the likelihood of beats.