The ISM manufacturing index climbed one tick to 54.9 in May

Week in review

CANADA: In April, the merchandise trade deficit narrowed to just C$0.4 billion from a revised C$0.9 billion in March. Exports rose 1.8% to a record high of C$47.7 billion, led by gains for energy products (+2.5%), motor vehicles and parts (+4.4%), and forestry products (+4.7%). Imports expanded 0.6% to C$48.1 billion (also an all-time high), buoyed by consumer goods (+3.7%), electronic equipment (+4.6%) and industrial chemicals (+4.9%). In the energy segment, exports swelled 2.5% while imports slumped by 14.0%. That translated into a 10.2% expansion of the energy trade surplus to C$6.4 billion, its highest level since October 2014. Alternatively, the non-energy trade deficit stayed roughly the same at C$6.8 billion. Geographically speaking, a widening deficit with China (-C$1.5 billion compared with –C$1.2 billion the prior month) was more than compensated by a surging surplus with the U.S. (C$5.0 billion compared with C$3.4 billion in March). In real terms, exports rose 0.8% while imports declined 0.8%. Total trade in Canada (nominal exports plus nominal imports), has risen 10.9% since April 2016, hitting its highest level ever at C$95.7 billion.

The gross domestic product (GDP) expanded at an annualized pace of 3.7% in the first quarter of 2017. In addition, upward revisions to the second half of last year lifted 2016 GDP growth one tick to 1.5%. Back to 2017Q1, while trade was a drag on the economy courtesy of surging imports and declining exports, that was more than offset by a solid gain for domestic demand. More specifically, consumption spending, residential investment, government expenditures and even business investment all posted increases. Inventories, too, contributed to growth after the prior quarter’s destocking. Nominal GDP grew a massive 8.3% on top of the prior quarter’s 7.5% advance, a positive for government finances. Moreover, the handoff to the second quarter was much better than anticipated, as output in March swelled 0.5% month on month. However, another spectacular quarterly growth print is not to be expected in Q2 for various reasons. First, the accumulation of inventories could lead to a ramp down in production. Second, stagnant real household incomes (+0.3% annualized in Q1) could limit consumption. Third, output in the energy sector is likely to moderate owing to production cuts at Syncrude. Finally, residential construction will certainly not be helped by measures implemented by the Ontario government, including a 15% tax on non-resident buyers. All things considered, we expect GDP growth to soften to roughly 1% annualized in Q2. Even then, the better-than-expected handoff from last year (after upward revisions to Q4) as well as Q1’s solid start (March growth was surprisingly strong) has prompted us to raise our GDP growth forecast for 2017 to 2.4%.

In Q1, the current account deficit widened by C$2.3 billion to C$14.1 billion (roughly 2.7% of GDP) owing to larger deficits on the goods trade, services trade and investment income accounts. The balance of international trade in goods posted a C$1.8-billion deficit after recording a C$0.1-billion surplus the previous quarter. Meanwhile, the services trade deficit increased by C$0.3 billion to C$5.7 billion. The overall trade balance deficit thus expanded by C$2.5 billion to C$7.5 billion (rounded figures). Separately, the primary income deficit edged up C$0.2 billon to C$5.9 billion as the investment income deficit increased by a similar amount to C$5.4 billion. Q1 data put Canada firmly on track to registering a current account deficit for a ninth consecutive year in 2017.

Labour productivity registered its second biggest quarterly gain in the last 10 years, rising 1.4% in Q1, following a 0.4% print in 2016Q4. While the real GDP of businesses expanded 1.1%, hours worked declined 0.3%. The productivity of services-producing businesses rose 2.0% in Q1 and was the main factor explaining overall productivity growth. In contrast, productivity in goods-producing industry increased 0.9%.

In April, the industrial product price index was up for an eight consecutive month, rising 0.6% month on month after climbing 0.8% in March. Prices moved higher in 14 of the 21 commodity groups surveyed, including primary non-ferrous metal products (+1.6% m/m) and energy and petroleum products (+2.9% m/m). Excluding the latter category, the IPP index was up 0.3% month on month. Year on year, the index sprang 6.3%, spurred by a 20.8% increase in the price of energy and petroleum products. Excluding this category, 12- month price inflation was more restrained at 4.4%.

UNITED STATES: The establishment survey showed nonfarm payrolls rising only 138K in May. Adding to the disappointment were downward revisions to prior months that decreased payrolls by 66K. In May, the private sector added 147K jobs with gains in both the goods (+16K) and services (+131K) sectors. Goods sector employment rose in construction and mining, offsetting a small drop in manufacturing. Private services sector employment was up in education/health, leisure/hospitality, financial and business services, but declined in trade/transportation (retail in particular) and information services. Government chopped 9K positions as declines at state/municipal levels more than offset increases at the federal level. Average hourly earnings rose 0.2% in May, or 2.5% on a year-on-year basis (unchanged from the prior month). Hours worked were up 0.1% in the month. In addition, the private sector employment diffusion index fell to just 54.8, the lowest since November last year. This indicates that job gains were concentrated in just a few sectors

The other employment report, the household survey showed employment falling 233K in May (albeit after solid increases in prior months) as declines in full-time employment (-367K) more than offset increases in part-time positions. But the job decline was offset by a two-tick drop in the participation rate to 62.7%, causing the jobless rate to fall one tick to 4.3%, the lowest since May 2001.

The ISM manufacturing index climbed one tick to 54.9 in May. The increase was due to new-orders and employment which both expanded at a faster pace than in the prior month, while the production sub-index fell slightly, though it remained well into expansionary territory (>50). So far in Q2, the pace of growth in the manufacturing sector seems to have let up somewhat. Whereas the index averaged 57.0 in Q1, it is averaging only 54.9 over April and May.

In May, the Conference Board’s Consumer Confidence Index edged down to 117.9 from 119.4 in April. Still, the index remained comfortably above its 12-month moving average of 109.4. The downward monthly movement of the overall index was driven by a 2.8-point drop in the expectations tracker from 105.4 in April to a four-month low of 102.6 in May. Even after this monthly blip, the expectations sub-index was still up a massive 24.1 points on its level a year earlier. The present situation gauge, on the other hand, climbed from 140.3 to 140.7, remaining near the 15-year peak it reached last March (143.9). Furthermore, the labour component of the report showed that the share of respondents noting jobs were hard to get dropped to a cyclical low of 18.2% from 19.4% in April.

According to the May edition of the Fed’s Beige Book, economic activity continued to expand at a modest to moderate pace in April and May in most of the country’s 12 districts. Several districts reported softening consumer spending, especially in the automobile segment. Moreover, moderate growth was observed in the manufacturing, nonfinancial and construction sectors. As for employment, a majority of districts noted labour shortages across a broadening range of occupations and regions. Despite the tightening of the labour market, employment and wage growth continued to be described as modest or moderate across the board. Finally, price increases were deemed modest.

The trade deficit widened 5.2% in April to $47.6 billion as exports declined 0.3% (to $191.0 billion) and imports rose 0.8% (to $238.6 billion) in dollar value. Exports were hampered by the automotive and consumer goods sectors. On the other hand, imports expanded thanks to the food/beverage and consumer goods sectors. The goods deficit increased 3.5% to $68.4 billion while the services surplus shrank 0.2% to $20.8 billion. Excluding the petroleum deficit, which was reduced by 17.1%, the overall trade shortfall widened 14.5% to $42.2 billion. In real terms, exports were down 0.4% while imports jumped 1.3%.

In April, nominal personal income advanced 0.4% month on month after increasing 0.2% in March. The wage/salaries component of income swelled 0.7%, while disposable income grew 0.4%. Personal spending, too, rose 0.4% on a monthly basis after increasing an upwardly revised 0.3% the previous month (initially estimated at 0.0%). Spending on durable goods expanded a healthy 0.9% after retreating 0.4% the prior month. Similarly, spending on non-durable goods rose a decent 0.6% month on month. Adjusted for inflation, both income and spending progressed at a 0.2% rate, leaving the saving rate unchanged at 5.3%, one-tenth below its 12-month moving average.

Also in April, the PCE deflator was up only 1.7% year on year, compared with 1.9% in March. Meanwhile, the core PCE deflator, which excludes food and energy, undershot the Fed’s 2.0% target for a 58th consecutive month as it rose only 1.5% on a 12-month basis, its smallest increase since December 2015.

Construction spending was down 1.4% month on month in April as both residential (-0.9%) and non-residential construction (-1.7%) pulled back. However, the overall decline came after spending growth for March was revised up sharply from -0.2% to +1.1%. Year on year, total construction spending was up 6.7%, compared with 5.0% in March. If no change is assumed over the next two months, construction spending in Q2 is on pace to decline an annualized 5.4% from Q1.

Still in April, the pending home sales index fell 1.3% in seasonally adjusted terms after dropping 0.9% the month before. Year on year, contract signings retraced 5.4%, their steepest decline since August 2014, after advancing 0.5% in March. The sag in sales can be explained in part by the limited amount of houses on the market. To be sure, the inventory of homes available on the resale market sank 8.2% to 1.8 million in the month. Looking ahead, though, supply constraints could be alleviated by the shifting sentiment among potential home sellers. Indeed, according to data compiled by the University of Michigan, the proportion of people who believed conditions were favourable to selling a home reached a post-recession high in May (the index soared to 73 from 59 in December).

According to the S&P CoreLogic Case-Shiller 20-city index, home prices in March rose 0.9% month on month in seasonally adjusted terms, their biggest monthly jump since February 2015. Prices were up 5.9% year on year, their sharpest yearly hike since July 2014. On a 12-month basis, prices increased faster on the west coast in cities like Seattle (+12.3%) and Portland (+9.2%) than on the east coast in cities like New York (+4.1%) and Washington (+4.2%). Prices were supported countrywide by tight supply. More specifically, the supply of existing homes on the market in April was equivalent to only 3.8 months of sales, its third lowest monthly figure in the past ten years. Though prices seem to be on an accelerating upward trend, it is worth noting that, in no fewer than 12 of the 20 cities surveyed, they are still below their pre-crisis level. True, the overall index is just 3.9% lower than its April 2006 summit, but the situation differs widely from one city to another. In Dallas and Denver, for instance, prices are up 39.5% and 41.0%, respectively, from their pre-recession peaks. Alternatively, prices in Las Vegas, Miami, and Chicago are still down 33.0%, 20.3% and 19.7%, respectively, from their all-time highs.

WORLD: In the Eurozone, the flash estimate of the consumer price index showed prices rose a meagre 1.4% year on year in May, their smallest 12-month hike in 2017. Core prices, which exclude energy, food, alcohol and tobacco, mustered a disappointing 0.9% print. The soft inflation will surely provide doves with ammunition at next week’s monetary policy meeting of the European Central Bank. Prior to the release of these data, some were speculating that the ECB might start discussing further tapering of its €60 billion/month bond-buying program. However, with inflation showing signs of weakening, participants are expected to favour a more prudent approach. ECB President Mario Draghi was certainly leaning in that direction when he suggested on Monday that the single-currency area still needed “an extraordinary amount of monetary support”. He added that he was “firmly convinced” that the ECB ought to stick with its quantitative easing program.

Also in the Eurozone, the seasonally adjusted unemployment rate slipped one-tenth to 9.3% in April, its lowest level since March 2009. While the jobless rate stayed put in Germany (3.8%) and France (9.5%), it slid 0.3 point in Spain from 18.1% to 17.8% and 0.4 point in Italy from 11.5% to 11.1%. In the latter country, unemployment reached its lowest point since September 2012. In the Eurozone as a whole, unemployment decreased almost a full percentage point in the 12 months to April. Over the same period, Spain saw its unemployment rate fall by 2.6 points, the largest decrease among the big four economies.

Still in the Eurozone, the European Commission’s economic sentiment index registered its first monthly decline this year, dipping 0.5 point to 109.2 in May after reaching its highest mark since September 2007 the prior month (109.7). Waning confidence in the services sector, which accounts for 30% of the overall index, was responsible for most of the tumble.

In Japan, the unemployment rate in April held steady at 2.8%, its lowest level in more than 20 years. In the meantime, the participation rate jumped to 60.3%, up 0.7 point from the month before. There were 1.48 jobs offered for every applicant, the highest ratio since the mid-1970s. However, the extreme tightness of the labour market did not seem to stimulate wage growth. Indeed, real household disposable income was down 1.5% year on year in April. Real household spending followed the same trend, dropping 1.4% from April 2016. That was the 14th consecutive month in which year-onyear spending registered a negative print.

On a more positive note, retail sales in Japan were up 1.4% month on month in April after rising 0.2% in March. On a 12- month basis, sales were up 3.2%, their steepest increase since April 2015.

Again in Japan, industrial production in April surged 4.0% on a monthly basis in seasonally adjusted terms, bouncing back from a -1.9% print in March. Year on year, output was up a healthy 5.7%. The monthly progression meant that industrial output in Japan exceeded the peak reached before implementation of a sales-tax hike in April 2014. In fact, the level of production was the highest since October 2008. In addition, shipments of capital goods excluding the transportation sector, a very good indicator of capital spending, swelled 7.1% in April after flagging 2.4% quarter on quarter in Q1. The only blemish on the report was a fifth consecutive monthly gain for inventories (+1.5%), which caused the inventory-to-sales ratio to surge 2.9% in April. This should not be cause for concern as long as it reflects businesses’ anticipation of a pickup in demand in Q2.

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