The Fed does not make a move again as Q1 economic growth disappoints. Here are the 5 things we learned from U.S. economic data released during the week ending April 29.
The Fed holds steady again. Unsurprisingly, the Federal Open Market Committee (FOMC) voted to keep the fed funds target rate at between 0.25% and 0.50% for a 3rd straight meeting following its rate hike last December. The policy statement released following last week’s meeting noted that the economy “appears to have slowed” even as the labor market “improved further.” Other contrasts painted in the policy statement included an “improved” housing market and “soft” net exports and fixed business investment. In addition, inflation remained below its 2 percent target, in part due to weakness in energy prices. The FOMC also voted to keep its policy of reinvesting principal payments made on its massive holdings of mortgage-backed securities and agency debt and to continue rolling over maturing Treasury securities. So, when will the FOMC bump up rates again? The statement was not specific, but said that rate hikes will be “gradual” and that the fed funds target rate will remain “below levels that are expected to prevail in the longer run.” The full FOMC did not agree on the strategy—Esther George wanted a 25-basis point hike rate hike at this meeting.
Early 2016 economic growth was like that of the end of 2015: Crummy. The Bureau of Economic Analysis initial estimate of Q1 2016 Gross Domestic Product (GDP) has the U.S. economy growing at a feeble seasonally adjusted annualized rate of 0.5%. This was the slowest pace of economic expansion in 2 years and was below the growth rates of the 2nd, 3rd and 4th quarters of last year of +3.9%, +2.0% and +1.4%, respectively. Consumption and government spending were the only major components of the economy that contributed to GDP growth. Yet, the contribution from consumption—adding 127-basis points to Q1 GDP growth—was the smallest in a year, reflective of tepid gains in spending growing (at a SAAR of only +1.9% vs. +2.4% during the final 3 months of 2015 and +3.0% during Q3 2015). Slowing fixed investment cost 27-basis points to Q1 GDP growth, including an annualized 1.6% drop in nonresidential (business) fixed investment. Residential fixed investment jumped an annualized 14.8% and added nearly a half point to GDP point. Businesses shed $17.5 billion in inventories, leading to a 33-basis point drag on GDP growth. Slowing exports cost another 31-basis points in GDP growth. The BEA will revise its estimate of Q1 GDP twice over the next 2 months.
Personal spending was essentially flat in March. The Bureau of Economic Analysis indicates that personal spending grew 0.1% to a seasonally adjusted annualized rate of $12.527 trillion. After adjusting for inflation, “real” personal consumption expenditures (PCE) were flat for the month and were up only 2.6% from a year earlier. Real spending on goods increased 0.3%, as a 0.7% gain in nondurables spending outpaced a 0.3% slowing in spending for durable goods (largely due to a 1.9% drop in spending for cars/trucks). Real spending on services slowed 0.1%. The softness in spending came even as personal income gained 0.4%. Disposable income also grew 0.4%, with real disposable income increasing 0.3% after adjustments for price variations. Personal incomes were 4.2% above March 2015 levels, with real disposable income up 3.1%. Meanwhile, the savings rate grew to its highest point more than a year with a 3/10ths of a point gain to +5.4%.
Orders for durable goods grew in March, but the gains were largely centered on defense aircraft. The Census Bureau said new orders for manufactured goods increased 0.8% during the month to a seasonally adjusted $230.7 billion. Even with the gain, new orders were 2.5% below year ago levels. Orders for transportation goods grew 2.9%, but the increase was centered around defense aircraft orders surging 65.7%. Falling were orders for civilian aircraft (-5.7%) and motor vehicles (-3.0%). Net of transportation goods, new orders slipped 0.2% for the month and were 1.4% below year ago levels. Increasing were orders for primary metals (+0.8%) and machinery (+0.5%) while orders declined for electrical equipment/appliances (-3.0%), fabricated metal products (-1.6%) and computers/electronic products (-0.6%). Shipments for durable goods declined for the 3rd time in 4 months (-0.5% to $237.0 billion, -1.5% vs. March 2015). Net of transportation goods, shipments improved 0.2% but remained 2.0% below March 2015 levels.
Consumers were less confident about the economy, especially when looking towards the future. The Consumer Confidence Index from the Conference Board lost 1.9 points to a seasonally adjusted reading of 94.2 (1985 = 100), essentially giving back all that it had gained in March and putting it near its lowest reading since last fall. The drop came solely from the expectations index, which declined 4.3 points to 79.3 (its lowest point in more than 2 years). The current conditions index added 1.5 points to 116.4, which was its highest reading since February. 13.4% of survey respondents expect business conditions will improve over the next 6 months (vs. 14.7% saying so in March) while 11.0% expect conditions will worsen (vs. 9.5% saying so in March). While stating that sentiment had “continued on its sideways path,” the press release stated that the survey’s findings suggest “no slowing in economic growth.”
Also falling was the Index of Consumer Sentiment from the University of Michigan. The measure shed 2.0 points to a seasonally adjusted 89.0, its lowest reading since last September and down 7.2% from the same month a year earlier. Like with the Conference Board Survey, the current conditions sentiment improved (up 1.1 points to 106.7) while the expectations index pulled back (down 3.9 points to 77.6). The press release claims the declines were “still far short of indicating an impending recession,” but may be reflective of “growing uncertainty about the economic policies advocated by various presidential candidates.”
Other data released over the past week that you might find of interest:
– Jobless Claims (week ending April 23, 2016, First-Time Claims, seasonally adjusted): 257,000 (+9,000 vs. previous week; -9,000 vs. the same week a year earlier). 4-week moving average: 256,000 (-8.9% vs. the same week a year earlier).
– New Home Sales (March 2016, seasonally adjusted annualized rate): 511,000 (-1.5% vs. February 2016, +5.4% vs. March 2015).
– Pending Home Sales (March 2016, Index: 2001 = 100, seasonally adjusted): 110.5 (February 2016: 109.0; March 2015: 109.0).
– Bankruptcies (March 31, 2016, Filings Over the Past 12 Months): 833,515 (-8.5% vs year earlier).
– Case-Shiller Home Price Index (February 2016, 20-City Index, seasonally adjusted): +0.7% vs. January 2016; +5.4% vs. February 2015.
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