Fed Cuts Bond Buys, Sees Growth Pickup The Federal Reserve said Wednesday that it would reduce its bond purchases to $45 billion a month and that it was starting to see a growth pickup in recent weeks after a harsh winter that hit the U.S. economy.
The central bank also stuck to its guidance on short-term interest rates, saying they would remain near zero for a “considerable time” after the bond-buying program ends later this year.
The Fed’s move came after a government report Wednesday showed the U.S. economy barely grew in the first quarter. The central bank’s policy-making committee acknowledged the first-quarter slowdown was worse than expected, saying in a statement that activity “slowed sharply.” Previously, the group had just said activity slowed.
Still, officials nodded to signs of economic improvement in March and April, suggesting they aren’t too worried about the winter slowdown.
Household spending “appears to be rising more quickly,” Fed officials said. Recent reports on retail sales and auto sales have been stronger than expected. But they said business fixed investment had “edged down” and repeated their view from March that the “recovery in the housing sector remained slow.” (…)
Ms. Yellen now enjoys an unusual period of calm. All nine voting members of the Fed’s policy committee supported the changes announced in the statement. That included Minneapolis Fed President Narayana Kocherlakota, who dissented in March.
The Fed committee currently consists of four Washington-based governors and five regional Fed bank presidents, for a total of nine voting members. Normally the committee has 12 voting members, but the Washington board now has three vacancies. Regional Fed bank presidents rotate on the committee from among 12 regional banks.
The committee has voted unanimously for action at two of its three meetings this year. That represents an unusually high degree of consensus for central-bank policy makers who have often been divided in the years since the financial crisis. Ms. Yellen has focused on maintaining consensus since taking the helm.
Gross domestic product, the broadest measure of goods and services produced across the economy, grew at a seasonally adjusted annual rate of 0.1% in the first quarter, the Commerce Department said Wednesday. It marked the second-worst quarterly performance since the recession ended in mid-2009.
Harsh weather likely slowed first-quarter business investment and discretionary consumer spending. It could have even blocked exports—which notched their sharpest decline since the recovery began—from reaching ports.
(…) While some easing was broadly expected, the severity of the first-quarter slowdown surprised many economists, who forecast a growth at a 1.1% rate in a Wall Street Journal survey. (…)
Forecasting firm Macroeconomic Advisers projects the economy will grow at a 3.5% rate in the second quarter and expects growth in that vicinity for the rest of the year.
The primary driver of the latest weaker-than-expected growth figure: Exports fell at the fastest rate since the recession ended, declining at a 7.6% pace in the first quarter. The performance partly reflects shaky economies in Europe and Asia generating poor demand, rather than underlying weakness in the U.S. (…)
Cold weather also could have played a role in tumbling exports, said Jason Thomas, director of research at the Carlyle Group. Reports from the private-equity firm’s 200 portfolio companies indicate about half that drop in exports could be attributed to shipments failing to reach U.S. ports due to weather delays, boosting the prospects for a spring pickup.
“We had the best backdrop for growth entering a year since 2007,” Mr. Thomas said. “I think it’s likely that we’ll still get the growth rate we expected.”
Wednesday’s report showed the pace of consumer spending on goods rose at a mere 0.4% during the quarter. That was the smallest gain since 2011, a sign of fewer discretionary purchases.
But households spent more on services, including energy to heat homes and health care, causing total consumer spending to rise at a 3.0% pace, only slightly below the fourth quarter’s 3.3% rate.
If not for the increased spending on health care and utilities, the economy would have contracted in the first quarter. Medical spending rose at a time when millions of Americans were enrolling in insurance plans created under the new health-care law.
Residential fixed investment—spending on home building and improvements—declined at a 5.7% rate in first quarter. Cold weather likely halted some building. But other factors, including mortgage rates that are a percentage point higher than a year earlier, could be dissuading families from moving.
Business spending on equipment fell at a 5.5% pace in the first three months of the year. That was the largest decline since 2009. The slowdown in investment coincided with weaker hiring during the quarter. (…)
A separate Labor Department report Wednesday showed the employment-cost index, a broad measure of pay and benefits, rose a seasonally adjusted 0.3% from January through March. That was slower than the 0.5% gain in the fourth quarter of 2013. (…)
An analysis from Joan McCullough, East Shore Partners (via John Mauldin)
Consumption clocked in at a totally respectable 2.04%.
The breakdown?
On goods, the q/q figures look like this: Q4 0.66. Q1 0.08. Oops. Wrong way. But:
ON SERVICES: 1.96 up from 1.61.
What falls under Services spending?
Household Consumption.
Which includes spending on Housing and Utilities. And Healthcare. Which by the way, were the run-away leaders to GDP at 0.73 and 1.10, respectively, both up significantly from the prior quarter.
Ain’t that a real commentary about life in these United States? Your biggest concerns: the roof over your head, utilities and the mess that is healthcare spending. From the subsidizing heightened by Obamacare … to the outrageous OOP costs it has triggered.
These are all necessities. And this is where the spending has gone. Once again, there was no other major GDP component that contributed outside of Consumption. On Spending. Necessary spending to boot. OMAB.
PS For the heck of it, we point out that also under Services spending, spending on recreation services and food services/accommodations both went negative. Makes sense. By the time you pay the rent, the light bill and your healthcare premium or OOP, it’s you, Netflix and a bag of microwaveable popcorn.
I see I hit a nerve.
The good bit about today’s lousy GDP? The revisions are TBD. And even if they don’t throw us the required heater, when it gets this bad, the only way to go is up. So coming off no growth, +2% looks like a hot, steamin’ deal.
U.S. Consumer Spending Surged 0.9% in March Consumer spending rose in March at its fastest pace in nearly five years, providing fresh evidence that the U.S. economy gained strength with the arrival of spring.
Personal consumption—spending on everything from electricity to sliced bread—surged a seasonally adjusted 0.9% from February, the Commerce Department said Thursday. That was its largest gain since August 2009. Economists surveyed by The Wall Street Journal had predicted a 0.6% rise in consumer spending.
Spending on physical goods rose 1.4% in March, including a 2.6% rise in spending on durable goods. Spending on services grew 0.7%.
Total consumer spending in February was revised up to 0.5% growth from an earlier estimate of 0.3%, providing a stronger foundation headed into March.
Consumer spending generates more than two-thirds of U.S. economic output. It sagged with the arrival of unusually harsh winter weather, growing a mere 0.1% in December and 0.2% in January following a muscular 0.6% rise last November. Still, its growth propped up the nation’s economy in the first quarter, helping offset big declines in exports and business investment.
Personal income rose in March by a seasonally adjusted 0.5%. Economists had predicted a 0.4% rise from February.
The personal saving rate fell to 3.8% in March, its lowest level since it hit a postrecession low of 3.6% in January 2013. It had been 4.2% in February.
Prices ticked up in March. The price index for personal consumption expenditures, which is the Federal Reserve’s preferred inflation gauge, rose a seasonally adjusted 0.2% from February, and rose 0.2% excluding the volatile categories of food and energy.
The price index was up 1.1% in March from a year earlier, and rose 1.2% excluding food and energy. That is up from February, when prices rose 0.9% from a year earlier, but inflation remains well below the Fed’s 2% target.
Beginning in 2008, a pair of economists at the Massachusetts Institute of Technology began tracking prices across the Internet to see if they could beat the Labor Department at its own game. Their task? Estimate the U.S. rate of inflation accurately before the government released its Consumer Price Index.
Dubbed the Billion Prices Project, that effort provided an amazingly close estimate of the CPI. Until quite recently, that is.
The PriceStats index, first developed by Alberto Cavallo and Roberto Rigobon at MIT, is part of a growing body of research that seeks to marry computer science and economics to gather real-time data online. The Internet-based measures hope to predict and even outdo official government statistics, and the gap between PriceStats and the CPI in recent months is a compelling test case as to which approach is better.
Their Web-based measure, now known as the State Street PriceStats inflation series, has tracked the official CPI so closely that it is frequently cited as proof that the Labor Department’s measure is honest and can be independently verified. So does the emerging gap reflect that the government measure is being cooked?
Actually, what’s happening is less sinister and more interesting, according to Jessica Donohue, the senior managing director at State Street who helps oversee the index. The gap could be explained by bad weather, and the superiority of online data in measuring commerce that increasingly takes place over computer screens, not cash registers.
To examine the divergence, Donohue looked at the monthly change in the two series, and quickly honed in on a split during the fourth quarter of 2013.
“It was really as you headed into November and December that the PriceStats series really ratcheted up while the official CPI had two months of going down,” she says. What else, she asks, happened in the last three months of 2013? “We had an overly harsh winter that started early. So people were buying through their online purchases more than their bricks-and-mortar purchases.”
If bad weather depressed foot traffic at stores, then retailers may have kept prices somewhat lower to keep the business coming in. Yet online, where purchases continue snow or shine, retailers had no need to offer discounts to bring in sales.
“The CPI is very much a bricks-and-mortar indicator and the PriceStats index can get a handle on demand even when weather conditions are tough,” she said. For the CPI, the Labor Department sends hundreds of price collectors into stores to record prices on the shelf. The PriceStats index, by contrast, scrapes the prices off websites.
And she has a bold prediction for the inflation outlook. Now that people aren’t hindered by weather, the CPI should converge toward the PriceStats Index, and not the other way around.
That could be welcome news for the Federal Reserve and for others who fret about inflation running too low. The official measure of inflation climbed 1.5 percent in March from a year earlier. The PriceStats measure, by contrast, has risen 2.5 percent. If Donohue and PriceStats are right, the disinflation scare of recent months could soon be over.
2.5% could be welcome news? Hmmm…
South Korean exports rose 9 per cent in April from a year earlier – the highest figure for 15 months – as strong sales to the US reinforced hopes of an improved performance this year in this export-dependent economy.
Exports to the US grew 19.3 per cent, while sales to the ASEAN group of nations – which together account for more than a sixth of the country’s exports – increased 17 per cent, the trade ministry said on Thursday.
However, the encouraging export data were tempered by a weaker performance in China, where exports rose only 2.4 per cent. China is overwhelmingly South Korea’s biggest trade partner, and the countries are hoping to reinforce this relationship with a trade agreement later this year, but South Korean policy makers are watching closely China’s slowing growth and signs of stress in its financial sector. There was an even worse result in the EU, where exports declined 3.2 per cent.
New order growth accelerated since March and was one of the fastest recorded over the past four years. April data pointed to only a modest contribution from export sales, although the latest expansion of incoming new work from abroad was the most marked since August 2013.
The April PMI® registered 54.9 percent, an increase of 1.2 percentage points from March’s reading of 53.7 percent, indicating expansion in manufacturing for the 11th consecutive month. The New Orders Index registered 55.1 percent, equal to the reading in March, indicating growth in new orders for the 11th consecutive month. The Production Index registered 55.7 percent, slightly below the March reading of 55.9 percent. Employment grew for the 10th consecutive month, registering 54.7 percent, an increase of 3.6 percentage points over March’s reading of 51.1 percent. Comments from the panel generally remain positive; however, some expressed concern about international economic and political issues potentially impacting demand.
LOW U.S. INFLATION: IT’S THE WEATHER!