Monthly Economic Review: The United States

The Greenback hasn’t been attracting a lot of bullish forex traders recently, likely because of speculation that the Fed won’t be able to hike rates by March and beyond. But what about the recent fundamentals? Are they also scaring away forex traders? Time to find out!

Growth

The advanced estimate for Q4 2015 US GDP was a disappoint for most forex traders since it only expanded by 0.7%, which is a far cry from the previous quarter’s 2.0% growth.

The annualized reading was also just as disappointing since it only printed a 1.8% growth (2.1% previous). This means that annualized US GDP growth has been slowing down for the third consecutive quarter now. This also means that the US Fed hiked rates while the US economy was slowing down.

Looking at the details of the report, consumer spending grew by 2.2% quarter-on-quarter (3.0% previous), adding around 1.46% (2.04% previous) to quarterly GDP growth. Also, consumer spending is still the backbone of the US economy, since it was able to offset the -0.47% (-0.26% previous) contribution from the negative trade balance due mainly to the 2.5% contraction in exports (+0.7% previous). Consumer spending was also able to offset the second consecutive decline in private domestic investment (-2.5% vs. -0.7% previous), which subtracted 0.41% from GDP growth (-0.11%).

Employment

If y’all can still recall, I wrote in my Forex Trading Guide for the NFP report that “most of the leading indicators are leaning heavily towards a possible slowdown in employment growth, so a lower net increase in jobs is to be expected for the upcoming NFP report.” Well, looks like I was right on the money since the January period NFP report shows that non-farm payrolls only increased by 151K, which is much lower than the previous reading, even though the previous reading was downgraded from 292K to 262K.

Still, the smaller-than-expected net increase in employment was more than enough to push the jobless rate lower to 4.9% (5.0% previous), which is a an eight-year low. And it’s a healthy downtick to boot since the labor force participation rate nudged higher from 62.6% to 62.7%, which means that the U.S. economy was able to absorb the influx of people who decided to join or rejoin the labor market.

Moreover, most of the jobs gains were apparently full-time jobs since the number of full-time workers increased to 123,141K from 122,603K. The retail trade component, in particular, added around 58K jobs, which is a good sign that consumer spending is healthy. And last but not least, wages grew by 0.5% after stagnating previously. This is a faster pace than expected and will likely drive up consumer spending and may even prop up inflation.

Business Conditions & Sentiment

Both Markit and the Institute for Supply Management (ISM) are saying that things got better for the manufacturing sector during January, but the two survey providers are also at odds with each other since Markit is saying that the manufacturing sector is expanding at a faster pace (52.4 vs. 51.2 previous) while the ISM is saying that the modest contraction slowed down a little bit (48.2 vs. 48.0 previous).

However, both reports also noted that new orders and production expanded at faster rates when compared to December 2015. But on a more downbeat note, both reports also concluded that domestic demand was the main driving force and that export continue to decline even further.

Moving on, ISM’s non-manufacturing PMI is still above the 50.0 neutral mark (53.5 vs. 55.8 previous), so non-manufacturing industries are still expanding, albeit at a slower pace that just so happens to be a two-year low. New orders were still coming in, but fell during the period (56.5 vs. 58.9 previous). Also, new export orders took an arrow to the knee as well (45.5 vs. 53.5 previous).

And on an even more downbeat note, prices paid by manufacturers fell during January (46.4 vs. 51.0 previous), with 11 industries reporting lower prices versus only three industries that saw higher prices, which is gonna be bad news for January CPI (and possibly even February CPI).

Consumer Sentiment & Spending

I concluded in my Forex Trading Guide for the January period retail sales report that “the leading indicators are pointing to a stronger retail sales reading for the January period, with odds being skewed slightly towards an upside surprise.” Well, if you read my Forex Trading Guide, then you probably weren’t surprised that the headline retail sales reading came in at 0.2% (0.1% expected, 0.2% previous) while the core reading printed a 0.1% increase (0.1% expected, 0.1% previous).

The headline reading looks even better on a year-on-year basis since it shows an increase of 3.4%, which is the fastest increase since January 2015. Most store types reported higher sales, but the total sales value from gasoline stations declined even further (-3.1% vs. -1.1% previous). This was probably due to lower oil prices, though, since motor vehicle and parts dealers reported a 0.6% increase in sales.

Looking forward, the preliminary February reading for the University of Michigan’s (UOM) Index of Consumer Sentiment came in at 90.7, which is a bit lower than January’s 92.0 figure. According to the report, “The small early February decline was due to a less favorable outlook for the economy during the year ahead,” but the lower consumer sentiment may not have that much of an impact on consumer spending since “consumers viewed their personal financial situations somewhat more favorably.”

Inflation

Headline CPI for the December period was kicked into the red (-0.1% vs. 0.0% previous) for the first time in three months due to lower food prices (-0.2% vs. -0.1% previous) and large declines in fuel prices, with fuel oil down by 7.8% (-1.3% previous) and motor fuel down by 4.0% (-2.5% previous).

But it fared a bit better on an annualized basis since oil prices were actually less of a drag. Motor fuel, for example, only printed a 19.9% decline (-24.2% previous).

The annualized core reading was also able to tick higher to 2.1%, which is the highest reading ever since July 2012. The uptick was due to the price of services increased by 2.9%, which is the same pace as the previous month, while the price of commodities shrank at a slower rate (-0.4% vs. -0.6% previous).

Summary & Conclusion

Overall, the US economy is very solid on the domestic front since the labor market is rather strong and consumer spending continues to be robust, which is going to be good news for Q1 2016 GDP since consumer spending has been the main driver of US GDP growth.

However, things look a bit more grim for overseas trade since PMI readings are indicating that exports declined further in January. And while inflation for the December period was pretty horrid on the surface because of the lower oil prices, the underlying or core reading seems to be healthy enough. However, the PMI readings are hinting that prices declined in January, so Fed officials have some reasons to have a slightly more dovish stance, and forex traders have reasons to be a bit pessimistic on the Greenback… until the next data dump at least.