THE U.S. ECONOMY: OK OR NOT?
The Fed says the economy is ok, at least ok enough to keep tightening even though inflation has slowed down considerably in 2017. The Atlanta Fed GDPNow has slipped to +2.9% for Q2 while the NY Fed Nowcast signals +1.9%, both significantly less buoyant than in March.
- The Fed says the economy is performing about in line with its forecast, but everybody else is totally surprised by its weakness. (Charts below from Ed Yardeni)
- If the U.S. is the engine of the world, commodity prices are not suggesting the world is strong.
- The U.S. petroleum usage is declining:
- The ECRI weekly index has rolled over:
- The U.S. electricity consumption is peaking again:
- Truck tonnage and intermodal volume are not showing any signs of strengthening final demand:
- Fortunately, consumer labor income remains solid, sustaining consumption and retail sales.
- Problem is, an ever larger part of the consumer budget goes to healthcare, education and lodging as these charts from Evergreen Gavekal demonstrate:
- Americans tend to focus on the ISM surveys for short term economic trends and these have been rather encouraging lately. However, IHS Markit’s PMIs have proven to be smarter short term economic forecasters in recent years:
Weak US PMI signals confirmed by official data
Official data showed US manufacturing output missing expectations in May, adding to a flow of recent data that point to a renewed bout of industrial weakness.
PMI survey data not only accurately predicted the downturn in industrial growth, but also revealed the underlying factors behind the slowing, notably a waning of both capex and consumer spending. The numbers therefore suggest there are downside risks to the near-term outlook for the US economy.
Commerce Department data indicated that factory production fell 0.4% in May. The decline was the second in the past three months, and suggests that industry is once again starting to struggle after a strong start to the year.
It’s not just output that is falling. Official statistics also showed a drop in both factory orders and the narrower gauge of durable goods orders in April, the latest month for which data are available. Meanwhile, manufacturing payrolls numbers slipped back into decline in May, dropping for the first time since last October.
By contrast, output, orders and employment had all been growing at encouragingly solid rates earlier in the year.
Production was just 0.3% higher in the three months to May compared to the prior three months period, which is the worst performance since November. This compares with a two-and-a-half year high of 0.8% in February.
Similarly, manufacturing payroll numbers has increased by some 52,000 in the three months to February – the largest gain for over two years. That rate of job creation has since more than halved. Just 21,000 jobs were added in the three months to May. (…)
An analysis of the detailed sector data behind the PMI numbers provides further insight into the current state of demand. The data reveal that new orders for investment goods, such as plant and machinery, and consumer goods have risen at considerably reduced rates in recent months, with the latter slowing especially sharply.
While the slowing in growth of new orders for investment goods hints at a cooling of capital spending by businesses, the downturn in the new orders index for consumer goods signals a deteriorating trend in household spending. (…)
This moderation of retail sales growth corresponds with a decline in the PMI’s consumer goods new orders index from a peak of 58.2 in the three months to January to a 17-month low of 53.2 in the three months to May.
The above chart uses the PMI new orders index from US producers of consumer goods tracked against the 3m/3m per cent change in retail sales. Actual retail sales will include imported goods, so the correlation will naturally not be perfect. However, the chart highlights how it is very unusual for the PMI series to send a misleading advance signal as to turning points in sales growth. Note also that the PMI data are available two weeks prior to the official retail sales data. (…)
Whereas the survey indices had been trending higher late last year, in recent months they have been trending down. These latest disappointing May numbers are therefore unlikely to be spurious readings, but are instead a reflection of a renewed struggle of US manufacturers in the face of waning demand.
This next chart plots the ISM (black) and IHS Markit (red) PMIs since December. The hope is that the good ISM-adjusted readings of the June Philly and NY Fed PMIs are confirmed by the national PMIs…
We thus have a situation where the Fed is raising short term rates while long term rates, inflation and most major economic gauges are weakening. Based on the experience so far this century, the better bet has to be away from the Fed…
U.S. Import Prices Slow as Petroleum Falls, Other Prices Flat
(…) Nonpetroleum import prices were unchanged after April’s 0.3% increase, revised from 0.4%; their y/y increase was +1.0%. Among end-use categories, industrial supplies & materials prices excluding petroleum also decreased, down 0.5% (+5.8% y/y), breaking a strong six-month advance. Categories with increases included foods, feeds and beverages, which rose 1.2% (4.1% y/y) and motor vehicle & parts, up by 0.1% (0.1% y/y). Capital goods prices were flat overall (-0.4% y/y) and excluding computers, they eased 0.1% (-0.5% y/y). Consumer goods prices excluding autos were also unchanged in the month, and they were down 0.2% y/y. (…)
SENTIMENT WATCH
Investors pour $30bn into global ETFs US equity funds reap benefits of continued market rally
Investors poured $31.6bn into ETFs globally in the week ending on Wednesday, beating a previous high for the year of $26.5bn during the week to April 26. (…)
Record level of investors fear corporate bonds are overvalued
(…) Eighty-four per cent of investors polled in the second quarter said corporate bonds are overvalued, according to a survey by the CFA Society. This is the fifth consecutive quarter of increase and the highest since the industry body began asking about valuations in 2012.
The majority of investors, 82 per cent, also think government bonds are overpriced, an increase of 4 per cent from the last two quarters. (…)
Adding to the sense of pessimism are investor concerns over developed-market equities. Sixty-nine per cent of respondents said they were overvalued, up from 40 per cent in the first quarter of 2016. Only emerging market stocks were perceived to be fairly valued, with 41 per cent of respondents saying they were undervalued and 34 per cent saying they were correctly priced.
The findings tally with a separate survey from Bank of America Merrill Lynch, which also found a record number believe stocks are overvalued. (…)