Real GDP grew a consensus-matching 0.4% in May

Week in review

Canada – Real GDP grew a consensus-matching 0.4% in May, after a 0.1% increase in the prior month (top chart). Goods producing industries had a 0.5% increase in output, on the back of gains in oil & gas, manufacturing and construction which more than offset declines in agriculture, mining and utilities. Industrial production jumped 0.6% as a result. The services sector's output expanded 0.4% thanks to gains in real estate, transportation/warehousing, accommodation/food services, retailing, wholesaling, arts/entertainment/recreation, which more than offset declines in education, management and finance/insurance. Thanks to May’s results, and assuming a 0.1% increase in June, GDP is on track to grow at an annualized pace of roughly 2.5% in Q2, i.e. more than double the pace of the prior quarter, and much in line with the Bank of Canada’s estimate.

The Survey of Employment, Payrolls and Hours (SEPH) a survey of establishments (unlike the Labour Force Survey which surveys households), showed that Canada gained 43K jobs in May. However, the SEPH’s year-on-year earnings growth moderated to 2.6% in May. Annual wage growth topped the national average in sectors like mining/oil/gas, utilities, finance/insurance, management, arts/entertainment, health care/social assistance. Sectors including construction, transportation/warehousing, real estate, accommodation/food services, and education had annual wage growth below the national average in May. All told, after lagging the LFS, the SEPH is now a bit more in line with that survey in terms of employment creation. The SEPH’s 13K jobs/month (12-month average) is now even a bit higher than the 10K/month paid jobs in the LFS, but both are consistent with a labour market that’s creating jobs at about half the pre-recession pace. Wages, however, seem to be firming somewhat. With May’s results, and assuming no change in June, SEPH payroll wages are on track to grow about 5% annualized in Q2, about triple the pace of the prior quarter. That explains the jump in consumption spending (e.g. retail sales) in the quarter.

United States – Non farm payrolls rose 209K in July (lowest since March), a bit below the 230K expected by consensus. There was, however, a 15K upward revision to the prior months to reflect more complete data. The private sector added 198K jobs in July (lowest since January). Goods sector employment rose 58K thanks to gains in manufacturing, mining and construction. The private services sector created a net 140K jobs, also with broad based gains. Government added 11K jobs. Average hourly earnings were roughly flat, while aggregate hours worked increased 0.2%. Released at the same time, the household survey (which surveys households as opposed to establishments) showed a gain of 131K jobs. That, however, was not enough to prevent the unemployment rate from rising one tick to 6.2%. The participation rate rose one tick to 62.9%.

The ADP employment report showed a 218K increase in July with job gains mostly in small firms, i.e. those employing less than 50 employees, which added 84K to payrolls, and mediumsized firms which added 92K. Large firms increased employment by just 41K.

Weekly jobless claims data for the week of July 26th showed initial claims rising to 302K, from a downwardly revised 279K. Continuing claims for the prior week rose 31K to 2.54 million. The rate of layoffs, as measured by the more reliable 4-week moving average initial claims (297K), is now at the lowest since 2006. The hotter labour market is also reflected in higher cost pressures for employers, as evidenced by the employment cost index which rose 0.7% in Q2, the biggest quarterly jump since 2008. Wages and salaries rose 0.6%, while costs related to benefits jumped 1%.

The ISM manufacturing index rose to 57.1 in July, the highest since April 2011. The production sub-index was up more than a point to 61.2 (from 60.0), while the new orders sub-index soared to 63.4 (from 58.9).The employment subindex also jumped to 58.2 (from 52.8). Markit’s flash/preliminary estimate of the U.S. services purchasing managers index was unchanged at 61 in July. A reading above 50 implies expansion in the services sector. Both the employment and “new business” sub-indices, while remaining in expansion mode, fell at bit in July.

The Conference Board’s consumer confidence index jumped to 90.9 in July, the highest since October 2007. The increase was due to both perceptions about the present situation (sub-index rising to a multi-year high of 88.3) and to consumers’ view of economic prospects, the latter’s sub-index rising to 92.7, the highest since February 2011. Consumers were a bit more optimistic than in the prior month about future business conditions, employment and income. However, they were slightly less keen than in June to buy autos, homes or major appliances.

The Bureau of Economic Analysis’ advance estimate of Q2 GDP growth came in at a consensus-topping +4% annualized after an upwardly revised -2.1% print in the first quarter (from - 2.9%). Domestic demand was supported by consumption spending (+2.5%), business investment (+5.5%), residential investment (+7.5%), and even government spending (+1.6%). Trade was a drag on Q2 growth as imports grew faster than exports. After being a massive drag on the economy in Q1, inventories were this time a contributor to GDP. Still, final sales, i.e. GDP excluding inventories, grew a decent 2.3%. Nominal GDP grew at an annualized pace of 6%, the fastest since Q3 last year. The savings rate jumped to 5.3%, the highest since 2012, thanks to disposable income which rose faster than consumption spending for the second consecutive quarter. As is the case once a year, there were revisions going back several years. Annual GDP growth was revised down for 2011 (1.6% versus 1.9% previously) and 2012 (2.3% versus 2.8% previously), and up for 2013 (2.2% versus 1.9% previously). Overall, the Q2 results were good and, together with the revisions, put the U.S. on track to achieve growth of 2.0% in 2014. That assumes second half growth averaging 3% annualized. While the inventory build in Q2 could put that at risk, we remain confident that this can be achieved if, as we expect, consumption is boosted by re-leveraging and a hot labour market, business investment spending speeds up in synch with better growth prospects, and exports accelerate with an improving global economy.

Both personal income and personal spending rose 0.4% in June. With income and spending rising at the same pace, the savings rate was unchanged at 5.3%. In real terms, both disposable income and spending rose 0.2%. The PCE deflator was up 0.2% in June, taking the year-on-year rate down one tick to 1.6% (from a downwardly revised 1.7%). The core PCE deflator was up 0.1%, leaving the annual core rate unchanged at 1.5%.

Construction spending fell 1.8% in June, more than erasing the prior month’s gains. June’s decline, however, was mostly due to the non-residential sector (-2.8% after healthy gains in the prior months), while there was a 0.2% decline in the residential sector. Overall, construction spending is still up 5.5% compared to levels of June 2013 (+7.1% for residential and +4.6% for non-res).

Pending home sales fell 1.1% in June, after a 6% jump in the prior month. The declines in June were centered in the Northeastern (-2.9%) and Southern (-2.4%) parts of the country, which more than offset increases in the West (+0.2%) and Midwest (+1.1%).

The Case-Shiller home price index fell 0.3% on a seasonallyadjusted basis in May. That’s the first drop in 28 months. As a result, the annual home price inflation rate moderated to 9.3%, the lowest since February last year. On a 3-month annualized basis, home price inflation decelerated to just +4.1%, the slowest in two years, as double digit gains in cities like Detroit (+18.5%), Miami (+12.6%), Minneapolis (+11.2%) and Boston (+10.5%) were offset by modest price gains in Washington (+3.3%), Charlotte (+2.6%), San Diego (+2.4%), Cleveland (+0.4%), and even declines (also on a 3-month annualized basis) in cities such as New York, Phoenix, and Atlanta.

The Fed’s statement was little changed from last June. The Fed acknowledged economic growth has picked up, the labour market conditions have improved and that “the likelihood of inflation running persistently below 2 percent has diminished somewhat”. Despite the improvements, the Fed says that “there remains significant underutilization of labor resources”. Based on this outlook, the Fed decided to trim its asset purchases by another US10 bn/month. It will now buy Treasuries at a pace of US$15 bn/month and MBS at a pace of $10 bn/month starting August. The Fed restated its flexibility to further taper the asset purchase program or even increase it if necessary. The FOMC kept unchanged its qualitative forward guidance with regards to the fed funds rate (e.g. “it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends”). There was one dissenter to the decision as Plosser objected to the guidance on the fed funds rate because he says the language is time dependent and does not reflect the considerable economic progress that has been made.

World – In the eurozone, the first estimate of July CPI showed the annual inflation rate dropping to just 0.4%, the lowest since October 2009. Core inflation was unchanged at 0.8% year-on-year. The zone’s unemployment rate dropped one tick to reach 11.5% in June, helped by declines in Spain, Italy, Portugal, although all of those still have elevated doubledigit jobless rates. The jobless rate was unchanged in Germany at 5.1%, but rose one tick in France to 10.2%. In Japan, June data showed retail sales rising just 0.4%, industrial production slumping 3.3% and the unemployment rate rising two ticks to 3.7%. Wage inflation remained mild as evidenced by labour cash earnings which were up just 0.4% year-on-year in June. All of those are consistent with a sharp deceleration in Japan’s GDP growth in Q2 (we’re expecting a contraction in that quarter). In China, the government’s measure of the manufacturing PMI showed an increase to 51.7 in July.