U.S. Consumer Spending Rose 0.1% in February

Personal spending, which measures outlays on everything from washing machines to haircuts, increased a seasonally adjusted 0.1% in February from the prior month, the Commerce Department said Monday. January’s spending growth was revised down to 0.1% from an earlier estimate of 0.5%.

Personal income, including earnings from wages and other sources, rose 0.2% last month after January’s unrevised 0.5% growth. It was the smallest monthly rise for income since September.

Economists surveyed by The Wall Street Journal had expected spending to rise 0.1% in February and income to climb 0.1% as well.

Households saved more in early 2016. The personal saving rate in February was 5.4%, up from 5.3% in January and 5.0% in December.

The personal consumption expenditures price index, which is the Federal Reserve’s preferred inflation measure, fell 0.1% from January and climbed 1.0% compared with February 2015. Energy prices tumbled 6.4% from January while food prices rose 0.2%.

Excluding the volatile categories of food and energy, core prices rose 0.1% in February from the prior month and climbed 1.7% from a year earlier, unchanged from January’s annual growth. (…)

In the final three months of 2015, consumer spending expanded at a solid 2.4% annual rate and contributed 1.66 percentage points to the 1.4% annual growth rate for gross domestic product, the Commerce Department said Friday.(…)

Accounting for price changes, consumer spending on both goods and services rose 0.2% in February from the prior month and was flat in January, the Commerce Department estimated in Monday’s report.

Durable-Goods Orders Weaken Amid Global Headwinds A key measure of U.S. manufacturing health tipped back into decline last month, evidence that headwinds from weak global growth, low oil prices and financial volatility are weighing on company spending.

New orders for durable goods—products designed to last at least three years, like dishwashers and aircraft—fell a seasonally adjusted 2.8% in February from a month earlier, the Commerce Department said Thursday. (…)

Spending on defense aircraft and parts led the decline, falling 29.2% on the month. Civilian aircraft orders fell 27.1%. (…)

New orders for nondefense capital goods excluding aircraft, considered a proxy for business spending on equipment, fell 1.8% in February following a 3.1% rise in January. (…)

Some economists lowered their estimates for first-quarter gross domestic product on the basis of Thursday’s report. Forecasting firm Macroeconomic Advisers lowered its projection to 1.5% from an earlier estimate of 1.9% growth.

Haver Analytics’ table reveal the continuing weakness in capital goods:

Evercore ISI tracks real capex shipments including aircrafts:

Doug Short’s chart illustrates the flat core capex over the last 4 years:

In all, U.S. manufacturing remains quite weak as Markit confirmed last week:

March data indicated subdued growth momentum across the U.S. manufacturing sector, thereby continuing the trend seen throughout 2016 to date. (…) Moreover, looking at the average PMI reading for Q1 as a whole (51.7), the headline index pointed to the weakest improvement over any quarter since Q3 2012. (…)

Although manufacturing production growth picked up from the 28-month low recorded in February, the latest rise was only marginal and one of the weakest seen over the past two-and-a-half years. Anecdotal evidence from survey respondents suggested that relatively subdued demand conditions and, in some cases, efforts to streamline post-production stocks, had acted as a headwind to output growth in March.

New business volumes continued to increase across the manufacturing sector, but the latest expansion was only slightly faster than in February and still weaker than the post-crisis trend. Survey respondents noted that lower capital spending across the energy sector and subdued export demand had weighed on overall new order growth. (…)

Manufacturers signalled a further reduction in their inventory volumes in March. The latest fall in stocks of finished goods was the fastest since November 2015, while pre-production inventories declined at the steepest pace for over two years.

Obviously, manufacturers are not optimistic on a spring revival.

Thankfully, autos remain strong:

Forecast: March Sales Set to Hit Record-High

A WardsAuto forecast calls for U.S. automakers to deliver 1.7 million light vehicles this month, a record high for March and the largest volume for any month since July 2005’s 1,804,240 units.

The forecasted daily sales rate of 61,727 over 27 days is a best-ever March result. This DSR represents a 0.2% improvement from like-2015 (25 days), while total volume for the month would be 8.2% greater than year-ago. If deliveries meet or exceed WardsAuto’s expectations, March will be the eight consecutive month to outpace prior-year on a DSR basis.

The report puts the seasonally adjusted annual rate of sales for the month at 17.3 million units, below the 17.4 million SAAR from the first two months of 2016 combined, but well above the 17.1 million SAAR from same-month year-ago. (…)

Automakers are preparing for a strong Q2, as the WardsAuto production schedule shows a 4.8% increase in builds compared with Q1.

WardsAuto currently is forecasting 17.8 million LV deliveries in full-year 2016.

For how long?

(…) Cars have literally been driving the U.S. economy in the aftermath of the collapse in the energy industry which took high-paying jobs down with it. To be specific, car sales to marginal buyers who cannot afford the payment for very long have pushed car sales to record levels.

If you’re hoping this economic prop is sustainable, and you should be given the alternative, you’re apt to be disappointed. A recent Bloomberg story shed light on how sales have been turbocharged. As was the case with subprime mortgage lending which pushed homeownership to record levels, new car-financing entrants have been responsible for record car sales.

According to J.P. Morgan Chase calculations, among subprime lenders that tap the securitization market to in turn finance their operations, new entrants now account for 28 percent of the business, multiples of the single-digit market share they had between 2011 and 2013. That makes these corporate whippersnappers the biggest players in the market. Their secret weapon? That would be ridiculously lax underwriting standards to qualify unqualified buyers.

As was the case with subprime mortgages, it’s a great growth industry. That is, until it’s not. Investors keeping the lights on at these companies have apparently started to balk at the number of loans backing the securities they’re supposed to be lining up to buy going sour. According to Fitch Ratings, subprime delinquencies of 60 days or more hit 5.16 percent in February, a stone’s throw from the previous record of 5.96 percent in October 1996. (Danielle DiMartino)

Are we at peak employment? (via Valuewalk):

If you think this is unrelated with weak durable goods, here’s a chart for you:

Ed Yardeni plots this other relationship:

Hmmm…we sure need the consumer to consume! But there is a worrying bend in this Markit chart on core sales.

A recent retailers survey declined broadly last week and the latest Atlanta Fed GDPNow is down to +1.4%, half of its level 6 weeks ago!

So. Fed up, or not?

• The biz side of the economy is weak and weakening.
• So seems to be the consumer side.
• In spite of strong employment and rising wages.

In spite of a strong employment environment, consumers are not spending much. And now, it looks like employment can’t get much better…without triggering higher wages.

BTW:

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  American Airlines Flight Attendants Get Pay Hike

A day after announcing it will offer profit-sharing to its more than 100,000 employees, American Airlines said Thursday it would increase pay for its 25,000 flight attendants by about 6%.

Under its contract with flight attendants signed in December 2014, American was required to adjust pay scales once United Airlines reached a new joint contract with its flight attendants. Rather than wait any longer for United to reach a deal, American is going ahead with a pay hike, effective April 1. (…)

• Calif. to raise minimum wage to $15

According to the L.A. Times, the minimum wage will jump from $10 to $10.50 an hour in 2017 and will increase by $1 every year after that until reaching $15 an hour in 2022.

And while things are getting murkier and murkier…

The Decline of Dissent at the Fed Dallas Fed President Robert Steven Kaplan is part of a widening consensus taking root inside the nation’s central bank for a strategy of raising rates slowly in the months and years ahead.

During much of the post-financial-crisis era, many regional Fed bank presidents challenged views coming out of the Federal Reserve Board in Washington about monetary policy. Now Fed Chairwoman Janet Yellen has more of the institution marching behind her in agreement with her strategy of raising rates slowly in the months and years ahead.

A more cohesive Fed can make it easier for markets to read where policy is headed, but can raise the risk of officials thinking so much alike that they miss new threats to the economy, some analysts say. (…)

“We want to try to normalize [interest rates] as fast as we can,” Mr. Kaplan said in a Dallas office stuffed with memorabilia from his home state of Kansas and with management “how to” books he wrote at Harvard. “But we have to be patient and gradual.” (…)

Looking ahead to 2018, for example, officials see rates rising to somewhere in a narrow range between 2.125% and 3.875%. When Ms. Yellen took the job in 2014, the officials’ projections three years out varied much more widely, between 0.75% to 4.25%.

In addition to Mr. Fisher, the other policy outliers who have left the Fed in the past year are Charles Plosser, the former Philadelphia Fed president who also opposed easy money, and Narayana Kocherlakota, the former Minneapolis Fed president who advocated more aggressive easy-money policies. Mr. Plosser’s successor, Patrick Harker, has expressed centrist policy views. Mr. Kocherlakota’s successor, Neel Kashkari, has publicly challenged Ms. Yellen on bank supervision but not monetary policy. (…)

In two years on the job, she has faced nine dissents, including just two in the past 10 meetings. Mr. Bernanke faced 48 dissents in eight tumultuous years. (…)

Four of the 12 regional Fed bank presidents were affiliated with Goldman before joining the Fed, feeding public perceptions that the central bank is too close to big banks bailed out during the financial crisis. (…)

• The Fed Wants Markets to Stop Taking the Dot Plot So Seriously

(…) St. Louis Fed President James Bullard, a voting member of the policy-setting Federal Open Market Committee this year, said in a Bloomberg News interview Wednesday that the rate projections contribute to uncertainty. (…)

Gavyn Davies: Is the global economy snapping back into gear?

(…) It would be wrong to place too much importance on a single month’s data, especially when the nowcasts are heavily influenced by business and consumer surveys.

These surveys have remained mixed, but downward momentum has been partly reversed in most advanced economies, especially in the US where the regional Fed surveys for March have been identified by the nowcast models as major upside surprises. In fact, sentiment had become so pessimistic that even slightly better data have represented positive surprises relative to economists’ expectations, according to the Citigroup Surprise Indices.

These better numbers still leave the global economy growing at 0.7 per cent below trend, so spare capacity in the world system is still rising, and long term underlying inflation pressures should therefore still be dropping.

Better, but still not very good, is this month’s verdict. Full details of this month’s nowcasts can be found here. (…)

The slight improvement in recent data needs to be kept in context. The grim story of downward forecast revisions for growth in the global economy continues. For the fifth successive year, consensus GDP forecasts for 2016 have already been revised downwards by a full percentage point, and they continue to plummet. Even with this month’s better data, the global growth rate is still running about 0.7 percentage points below the consensus forecast for the calendar year, so further downgrades to forecasts look highly probable. (…)

It now seems likely that the US manufacturing sector has rebounded as inventories have stabilised, the effects of the strong dollar have abated, and cutbacks in energy investment have ended. For the first time since the first half of 2015, US activity growth now seems to be slightly above trend. (…)

China continues its pattern of mini cycles which last less than a year from peak-to-peak, super-imposed on a gradually declining trend rate of growth. It is not clear what causes this pattern, though it may be due in part to repeated bursts of policy support which periodically push the growth rate above trend, before fading away.

The latest mini cycle embarked on a downward phase in January 2016, and it has taken the activity growth rate down to only about 5.o per cent, the lowest rates recorded since the Great Recession. In contrast to previous episodes, the markets have not shown much concern about this dip in growth, apparently believing it to be temporary. It is clear that fiscal and monetary policy are now in expansionary territory, and this should lead to a recovery soon, albeit one that is based, as usual, on fixed investment.

As last week’s blog mentioned, the market’s insouciance may be connected to an improvement in the credibility of Chinese macro-economic and exchange rate strategy, compared to the implosion of confidence that followed confusing policy communications in 2015.

China Banks’ Profitability Pressures to Continue in 2016 Major Chinese banks’ results for 2015, which are due to be released next week, should show continued subdued earnings growth amid margin compression and asset deterioration. These trends are expected to continue in 2016, underscoring the negative sector outlook.

(…) The quarterly run-rate in reported NPLs decelerated in 4Q15, while we believe this is due partly to more substantial NPL write-offs/disposals towards the end of the year as banks struggled to meet their provisioning requirements.

The provision coverage ratio at state banks and joint-stock banks had fallen to 172% and 181%, respectively, on average by end-2015. The need to maintain this ratio above 150% will restrain earnings growth in 2016 – unless this ratio is relaxed. The floor could also encourage further under-reporting of NPLs.

Reports from local media today suggest that the authorities are considering lowering the provisioning requirement to 130%-140% for selected banks. Fitch believes a relaxation would run counter to a need for conservative provisioning at a time when asset quality is deteriorating and the concerns around the true level of NPLs in the system. That said, such changes in regulations in isolation should not have major rating implications as our analysis takes into account factors and performance trends beyond reported profitability figures.

The reduction in the interest burden for borrowers following successive rate cuts and other monetary loosening through 2015 should keep reported NPLs below 2% for most banks. The system-wide NPL ratio and “special-mention” loan ratio were 1.67% and 3.79%, respectively, at end-2015, up from 1.25% and 3.11% a year ago. The trend in overdue loans may paint a more interesting picture, though, as Chinese banks tend to report very similar NPL ratios despite varying levels of overdue loans.

Furthermore, changes in investment income or revaluation reserves may also signal deterioration in the quality of non-loan credit, especially in mid-tier banks. This may take the form of investment receivables representing a growing share in the asset mix.

Loss-absorption trends could be a key rating driver for most banks while profitability and asset quality weaken and pressure on provisioning increases. Major Chinese banks were key issuers of Additional Tier 1 (AT1) instruments in 2015, owing to increased pressure to shore up capital due to balance-sheet growth and slowing profitability. However, as long as assets continue to grow at a rapid pace and profitability remains subdued, there will be little underlying improvement in core capitalisation levels. Such capitalisation pressures continue to weigh on Fitch’s assessment of Chinese banks’ Viability Ratings, especially those of the mid-tier banks.

The expansion of non-interest income is likely to be a key earnings driver in 2015-2016, especially for mid-tier banks, driven by strong card and underwriting fees as well as the sale of wealth management products (WMPs). But Fitch views excessive reliance on WMPs as risky for banks, and a significant shift in the business towards this area could lead to increased credit and liquidity risks.

FYI:

Oil Firms Slow Exploration to Weather Low-Price Era The world’s biggest oil companies are draining their petroleum reserves faster than they are replacing them—a symptom of how a deep oil-price decline is reshaping energy industry priorities.

In 2015, the seven biggest publicly traded Western energy companies, including Exxon Mobil Corp. and Royal Dutch Shell PLC, replaced just 75% of the oil and natural gas they pumped, on average, according to a Wall Street Journal analysis of company data. It was the biggest combined drop in inventory that companies have reported in at least a decade.

For Exxon, 2015 marked the first time in more than two decades it didn’t fully replace production with new reserves, according to the company. It reported replacing 67% of its 2015 output. (…)

Because of accounting rules, there is another drain on the “proved reserves” that companies book and report to investors: low oil prices. The U.S. Securities and Exchange Commission defines proved reserves as the volume of oil and natural gas that a company can expect to tap at a profit.

Some of the reserves companies added are too expensive to extract profitably at today’s prices. That has forced some companies to remove barrels from their books, and in some cases to write down the value of those assets. (…)

Saudi Arabia loses oil market share to rivals in key nations

(…) The world’s biggest oil exporter lost ground to rivals in nine out of 15 top markets between 2013 and 2015, including China, South Africa and the US, according to an analysis of customs data.

Saudi Arabia set itself a goal in late 2014 of maintaining its crude market share amid a glut that prompted a collapse in oil prices, but the imports data compiled by FGE, an energy consultancy, suggest the country’s strategy suffered setbacks in some of its key customer countries last year.

Other data show that Saudi Arabia achieved a limited increase in global market share in 2015 compared to 2014, although last year’s figure was lower than that recorded in 2013. (…)

Saudi Aramco is using its financial muscle to buy more stakes in overseas refineries to lock in crude sales. (…)