GDP, CFNAI, Consumer Spending and Housing: What We Learned During the Week of June 22-26

Perhaps you have been distracted and didn’t follow U.S. economic data releases over the past week. Here’s what you missed during the week ending June 26.

Gross Domestic Product--Bureau of Economic Analysis
Gross Domestic Product–Bureau of Economic Analysis

1.While not as bad as previously thought, the U.S. economy contracted during the first quarter. The Bureau of Economic Analysis released its third estimate of first quarter Gross Domestic Product (GDP), which has the U.S. economy shrinking 0.2% on a seasonally adjusted annualized rate (SAAR) basis versus the 0.7% drop had been reported a month ago. The upward revision was the result of higher than previously estimated levels of exports and consumer expenditures. Among major segments of the economy, only consumption, the change in private inventories and fixed residential investment made positive contributions to economic activity. The rising U.S. dollar hurt export activity while business investment paused during the quarter. Further, corporate profits fell 5.2% during the quarter after having dropped 1.4% during the final 3 months of 2014. In all, harsh winter weather and the now settled West Coast port labor issues hurt economic activity during the opening months of 2015, but the consensus is that the slowdown was transitory. We will see the 1st estimate of 2nd quarter GDP growth on July 30th.

2. One economic indicator released last week finds below average economic growth during May. The Chicago Fed National Activity Index—a weighted average of 85 economic indicators—added 2-basis points during the month but remained negative for a 5th consecutive month at -0.17. The 3-month moving average improved by 4-basis points to -0.16. The negative reading is consistent with below average economic growth. Only 35 of the 85 tracked economic indicators made a positive contribution to the headline index with indicators related to production/income and consumption/housing being small drags on the economy. Meanwhile, indicators associated with employment made a positive contribution to overall business activity.

3. Consumer spending jumped in May, boosted by growing incomes. The Bureau of Economic Analysis estimates consumer spending grew 0.9% on a seasonally adjusted basis during the month, with a year-to-year gain of 3.6%. Spending on durable goods jumped a robust 2.2% while that for non-durables gained 1.9%. Spending on services inched up 0.3%. Personal incomes grew 0.5% for a 2nd straight month and were 4.4% above year ago levels. Wages also gained 0.5% during the month and were 5.0% above year ago levels. Some of the gain reflected a pick up in inflation—namely for energy goods—as the personal consumption expenditure (PCE) deflator grew 0.3%. Even after controlling for price gains, “real” consumer spending grew a still healthy 0.6% during May, with increases in spending of durable and nondurable goods of 2.3% and 0.9%, respectively. The savings rate inched down by 3/10ths of a point to +5.1%.

4. Housing sales blossomed in May. The vast majority of the housing market consists of transactions involving previously owned homes. The National Association of Realtors reported sales for that segment grew 5.1% during May to a SAAR of 5.35 million units (+9.2% versus May 2014), its fastest pace since November 2009. Sales grew during the month in all 4 Census regions, spanning for an 11.3% increase in the Northeast to a 4.1% gain in the Midwest. NAR’s press release stressed that “overall supply remains tight” and, as a result, prices are rising. More specifically, the inventory of unsold homes totaled 2.29 million units (SAAR) at the end of May, the equivalent to a 5.1 month supply. The median home price of $228,700 was 7.9% above year ago levels.

The other side of the market also enjoyed a pickup in activity. New home sales grew 2.2% during May to a SAAR of 546,000 units, up 19.5% from a year earlier. Sales increased during the month in the Northeast and West but declined in the Midwest and South. There were 206,000 new homes (SAAR) on the market at the end of May, matching April’s count and up 6.2% from a year earlier. This translated into a tight 4.5 month supply.

5. Consumer sentiment rebounded in June. The Index of Consumer Sentiment from the University of Michigan added 5.4 points during the month to a seasonally adjusted 96.1 (1966 Q1 = 100), its best reading since January when it had hit a post-recession high. The present conditions index surged 8.1 points to 108.9 (also its best since January) while the expectations index added 3.6 points to 87.8 (a 2 month high). The press release noted that “[c]onsumers voiced in the first half of 
2015 the largest and most sustained increase in economic 
optimism since 2004,” with strength seen across all major income cohorts. 
 The press release also noted that the results were consistent with a 3.0% growth in consumer spending during 2015.

Other reports released over the past week that you might find of interest:
Durable Goods Orders: May 2015: -1.8% (+0.5%, net of transportation goods)
Jobless claims: Week ending June 20, 2015: 271,000 (+3,000)

The opinions expressed here are not necessarily those of Kevin’s current, previous and future employers. No endorsements are implied.

FOMC, Factory Orders, Housing Starts: What We Learned During the Week of June 15-19

Week of June 15-19, 2015

With the weather heating up, you probably didn’t follow U.S. economic data releases over the past week. Here’s what you missed during the week ending June 19.

1. The Federal Reserve did not act last week, but most Fed voting members expect to hike short-term interest rates by the end of the year. The policy statement released following the conclusion of of the Federal Open Market Committee indicated that the U.S. economy had been expanding “moderately” with “the pace of job gains [having] picked up.” The committee also saw housing spending as “moderate” but business investment and exports were “soft” while inflation and salary gains were also “soft.” So, in a surprise to no one, the FOMC kept the fed funds target rate at near zero percent, where it has been since December 2008. But that is about to change.

The FOMC policy statement was accompanied by updated economic forecasts from Federal Reserve Board Members and Bank presidents. The median forecast for 2015 economic growth fell from a range of +2.3-2.7% to +1.8%-2.0% (reflecting the soft start to the year), but improved slightly for 2016 (to +2.4-2.7%) and 2017 (to +Screen Shot 2015-06-20 at 7.38.53 AM2.1-2.5%). The group also sees the unemployment rate slipping to roughly 5-percent for both 2016 and 2017 while inflation remains slightly below its 2-percent target. But even if inflation remains slightly soft, the typical prediction for the fed funds target rate is +0.625 at the end of this year, +1.625 at the end of 2016 and +2.875% at the end of 2017. Note that the forecasted fed funds rate for the end of 2017 is well below the peak before the previous recession of 5.25% (seen during summer of 2006 to the summer of 2007).

2. Factory activity continues to disappoint in 2015. The Federal Reserve’s Industrial Production report finds manufacturing output slipped 0.2% during May following tepid gains of 0.3% and 0.1% in March and April, respectively. Production of nondurable goods fell 0.7%, impacted by a 1.6% drop in output of petroleum and coal products and declines for most other nondurable goods. While durable goods production eked out a 0.2% pick up, much of that was the result of a 1.7% jump in automobile production. Manufacturing output was only 1.8% above year ago levels, the smallest 12-month comparable since January 2014. Manufacturing factory utilization slowed to 77.0%, down 2/10ths of a percentage point from April and its lowest point in 13 months.

3. Housing Starts dropped in May, but the number of issued building permits hit an 8-year high. The Census Bureau estimates there were 1.036 million housing starts on a seasonally adjusted annualized rate during May, off 11.1% from April but still 5.1% above year ago levels. Starts of single-family homes fell 5.4% for the month to 680,000 units (SAAR) while those for multi-family properties plummeted 20.1% to 356,000 units (SAAR). (Note that starts data for multi-family properties tend to be very volatile month-to-month.) Better news is that there were 1.275 million homes (SAAR) authorized by building permits during the month, up 11.8% for the month, 25.4% above year ago levels and the highest count since August 2007. Much of the month-to-month gain was for multi-family units, which enjoyed a 24.9% bump during the month. The same metric for single homes inched up 2.6% during May. The annualized count of housing completions gained 4.7% to 1.034 million units, up 14.5% from May 2014 and its highest reading since November 2008.

Beyond the encouraging permits data, another sign that the softening in starts will be short lived is the Housing Market Index, which added 5 points to a seasonally adjusted 59. This matches the National Association of Home Builders’ measure of homebuilder confidence post-recession peak reading achieved last September. The measure has been above a reading of 50 for 9 consecutive months, indicating more builders see the market as “good” versus seeing it as “poor.” Also improving were indices for current sales of single-family homes (up 7 points to 65), expected sales over the next 6 months (up 6 points to 69) and the traffic of potential buyers (up 5 points to 44). The NAHB’s press release notes that the current and future sales expectations indices “are at their highest levels since the last quarter of 2005, indicating a growing optimism among builders that housing will continue to strengthen in the months ahead.”

4. Rising gasoline prices led to the largest monthly gain in consumer prices in more than 2 years. The Bureau of Labor Statistics estimates the Consumer Price Index (CPI) grew 0.4% during May. Gasoline prices jumped 10.4% on a seasonally adjusted basis during the month, leading to a 4.3% gain in energy prices. Food prices were unchanged during May while core prices (net of both energy and food) inched up 0.1%. For most goods and services categories, prices were relatively stable during the month. Notable exceptions were transportation services (+0.7%), medical care categories (+0.4%), apparel (-0.5%) and used cars/trucks (-0.4%). CPI was unchanged from a year earlier (with energy CPI still 16.3% below year ago levels), while the core index was just below the Fed’s 2% target at +1.7%.

5. The U.S. economy of the second half of 2015 looks stronger than that of the first half. The Leading Economic Index from the Conference Board added 8/10ths of a point to 123.1, with 9 of 10 index components making positive index contributions (led by housing permits and the interest rate spread). With small gains were the concurrent index (up 1/10th of point to 112.1) and the lagging index (up 2/10ths of a point to 117.0). While the press release sees the results as “confirming” a stronger economy during the second half, it also noted that the weak industrial production and manufacturing data as “painting a somewhat more mixed picture.”

The opinions expressed here are not necessarily those of Kevin’s current, previous and future employers. No endorsements are implied.