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Transitory weakness and its persistence
Simply Economics - June 2, 2017
By Mark Pender, Senior Editor



The first quarter's unexpected weakness was labeled by the Federal Open Market Committee, in their May statement, as no more than "transitory" and that a bounce back in the second quarter, given the strong fundamentals underpinning the consumer, was definitely in the cards. Well, the cards aren't quite playing out that way. Wages are still not underpinning much of anything and may instead be holding back the consumer. And this is not very good for what now looks like a possible train wreck underway, that is second quarter GDP.


The economy

After strong showings in January and February, payroll growth has slowed sharply since. Nonfarm payrolls rose only 138,000 in May for a 3-month average of 121,000. This is the 3rd dip in a row for the average and its the poorest showing going back nearly 5 years. The May employment report, that included sharp downward revisions to April and March, is the new low in what has been a nearly uninterrupted run of unexpectedly weak economic data.


One reason for the slowing payroll growth is a dwindling pool of candidates to choose from, at 12.4 million in May which is the lowest in nearly 9 years. Those in this pool that are actively pounding the pavement, at 6.9 million, are the fewest in exactly 10 years. A declining supply of labor against even steady demand for labor should, by the common understanding of economics, be driving the price of labor higher. Yes? Well, not very much in our case.


Average hourly earnings barely came in at 0.2 percent, actually at 0.15 percent to be exact as tracked in the blue columns of the graph. In fact, monthly earnings haven't touched the 0.2 percent line for the last 3 months. The nation's run of weak data really began with the core CPI in March which posted an outright decline to signal what turned out to be a rare dip for the Fed's own inflation gauge, the core PCE which are the red columns. Month-to-month inflation is lifeless.


Inflation is most commonly expressed in annual terms and here too neither earnings nor the core PCE are tilting in the right direction. Average hourly earnings not only barely made a 0.2 percent monthly rate they also barely made the 2.5 percent year-on-year rate, at 2.46 percent and down from 2.51 percent in April. The hawks at this month's FOMC are certain to argue that wage inflation is only a matter of time. Theory is theory but there's no hint of pressure here.


Lack of wage gains and slowing payroll growth are certain negatives for total income where growth has been trending down from a 6 percent yearly rate in 2014 to under 4 percent now. Consumer spending will move in tow and has opened the second quarter at just over 4 percent and without much April punch. And May's wage data do not point to much lift for either personal income or consumer spending, the latter of which by the way makes up the bulk of GDP.


The effects of low wages are perhaps evident in the very first glimpse of consumer spending in May. Unit vehicle sales couldn't hold April's small bounce and went in reverse to a 16.7 million annualized rate which points squarely at weakness for dollar totals in the May retail sales report. Vehicle sales have been down this year and were a major negative for first quarter GDP. A rebound in vehicles, which has yet to happen, was to supposed to be a plus for the second quarter.


The second quarter took yet another consumer-related blow in the week, this time from housing data. The big Spring push in the housing sector hasn't gone very far at all. The pending home sales index, which tracks contract signings for existing home sales, was supposed to have bounced higher in April but instead fell 1.3 percent to an index level of 109.8. This points to unexpected trouble for final sales in May and June. Low wages keep home ownership out of reach.


What are American consumers spending on? Foreign consumer goods is the answer. In a one-two punch all its own on second quarter GDP, the nation's trade gap widened sharply in April. Total imports rose $1.9 billion to $239 billion with consumer imports, at $51 billion, rising $2 billion all on their own. Foreign buyers aren't nearly as interested in American products as exports fell $0.5 billion to $191 billion. April's trade data make it an uphill climb for second quarter net exports.


Markets: Data dependence or data independence?

"The actual path of the federal funds rate will depend on the economic outlook as informed by incoming data," is what the last FOMC statement says. They'll have to skirt by this line to get a rate hike in. But weak data and a Fed set to hike aren't worrying the stock market where indexes rose to a series of record highs in the week. But there are some nervous types as money also moved into the safety of 10-year Treasuries where the yield fell a sizable 10 basis points to 2.15 percent.


Markets at a Glance Year-End Week Ended Week Ended Year-To-Date Weekly
2016 26-May-17 2-Jun-17 Change Change
DJIA 19,762.60 21,080.28 21,206.29 7.3% 0.6%
S&P 500 2,238.83 2,415.82 2,439.07 8.9% 1.0%
Nasdaq Composite 5,383.12 6,210.19 6,305.80 17.1% 1.5%
Crude Oil, WTI ($/barrel) $53.71 $49.80 $47.77 -11.1% -4.1%
Gold (COMEX) ($/ounce) $1,152.50 $1,271.70 $1,280.80 11.1% 0.7%
Fed Funds Target 0.50 to 0.75% 0.75 to 1.00% 0.75 to 1.00% 25 bp 0 bp
2-Year Treasury Yield 1.21% 1.30% 1.29% 8 bp –1 bp
10-Year Treasury Yield 2.45% 2.25% 2.15% –30 bp –10 bp
Dollar Index 102.26 97.4 96.68 -5.5% -0.7%


The bottom line

It may be time to rewrite the text books and change our assumptions. Labor supply is low but wages are flat, and with flat wages consumer spending will be flat. Flat is also looking like the emerging and unexpected description of second quarter GDP. If Federal Reserve policy makers go ahead and raise rates at this month's FOMC, the word "transitory," or something close to it, will have to be dragged out and repeated several times to reassure everyone that the economy is really going in the right direction.


Week of June 5 to June 9

May updates on the service sector begin the week, first with PMI services, which accelerated in the mid-May flash, followed by ISM non-manufacturing which rose strongly in April. Also released Monday will be factory orders which will close the books on April which looks to have been a weak a month for manufacturing. Job openings in the JOLTs report, which have been rising, will be posted on Tuesday and will likely highlight the unwanted mismatch with hiring which has been lagging. Wednesday's consumer credit and Thursday's jobless claim reports will focus attention on the health of the consumer while wholesale trade, the week's final indicator on Friday, is expected to show a draw for inventories in what would be another negative for second-quarter GDP.




Nonfarm Productivity, 2nd Estimate, 1st Quarter

Consensus Forecast, Annualized Rate: -0.2%

Consensus Range: -0.4% to 0.2%


Unit Labor Costs

Consensus Forecast, Annualized Rate: 2.6%

Consensus Range: 2.2% to 3.0%


The first estimate for nonfarm productivity came in at minus 0.6 percent as it took more hours to produce at a slower rate. Weak productivity raises the cost of labor as unit labor costs came in at an annualized 3.0 percent rate. Forecasters see slight improvement for the second estimate with the productivity consensus at minus 0.2 percent and labor costs at plus 2.6 percent.


PMI Services for May, Final

Consensus Forecast: 54.0

Consensus Range: 53.0 to 54.0


PMI services had been soft but rose sharply in the May flash, to 54.0 from April's 52.5. Gains in the mid-month report were centered in new orders and included employment. Input costs have been rising in the report but, in a sign of strengthening demand, so have selling prices. The Econoday consensus for May's final is 54.0.


ISM Non-Manufacturing Index for May

Consensus Forecast: 57.0

Consensus Range: 56.5 to 58.0


ISM non-manufacturing stood out last year as reporting consistently strong results, stronger perhaps than actual growth. New orders have been over 60 in three of the last five reports and have been getting a boost from exports. Delivery times are slowing and input costs rising, both consistent with strong demand. April's strong index of 57.5 didn't match what were mostly weak results in the month's government data yet forecasters don't see much of a give back in ISM's index, at a consensus 57.0.


Factory Orders for April

Consensus Forecast, Month-to-Month Change: -0.2%

Consensus Range: -0.3% to 0.4%


Factory orders have been improving though are still struggling to keep in positive ground. Aircraft orders have been a plus this year but April's advance data in the durable goods report showed a downswing, one that pulls Econoday's consensus to minus 0.2 percent vs March's marginal 0.2 percent gain. Aircraft aside, May's durables data were mostly soft including little strength for capital goods. Note that inventories will be of special interest in the report given April draws in both retail and wholesale inventories.


Labor Market Conditions Index for May

Consensus Forecast: 2.6

Consensus Range: 0.8 to 4.5


The labor market conditions index has been signaling only modest strength in the labor market, much less than payroll growth or the unemployment rate would suggest. This index also picks up wages which have been soft. Forecasters see the index giving back some of its recent gains, to a May consensus 2.6 vs April's 3.5.




JOLTS: Job Openings for April

Consensus Forecast: 5.725 million

Consensus Range: 5.700 to 5.765 million


Job openings in the JOLTS report are expected to edge lower to a consensus 5.725 million in April vs a very strong 5.743 million in March. Job openings have been very high and have been well ahead of hiring, indicating that employers are having a hard time finding qualified candidates.




Consumer Credit for April

Consensus Forecast: $17.0 billion

Consensus Range: $15.0 to $20.0 billion


Credit growth has been moderate and steady with consumer credit posting gains in the $15 to $20 billion range. The revolving component has been uneven though growth in nonrevolving credit, reflecting vehicle financing and also student loans, has been steady and sizable. A $17.0 billion increase is expected for consumer credit in April.




Initial Jobless Claims for June 3 week

Consensus Forecast: 241,000

Consensus Range: 235,000 to 245,000


Jobless claims are very low and pointing to unusually strong demand for labor. Forecasters sees initial claims coming in at 241,000 in the June 3 week vs 248,000 in the prior week.




Wholesale Inventories for April

Consensus Forecast, Month-to-Month Change: -0.3%

Consensus Range: -0.3% to 0.4%


Wholesale trade inventories are expected to decline 0.3 percent in line with advance data that also came in at minus 0.3 percent. Inventories moved lower in April in a possible signal of business caution and a certain negative for second-quarter GDP.


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