Week in review: FOMC still sees risks to the outlook for economic activity

Canada – Real GDP was roughly flat in February, after a downwardly revised 0.2% drop in the prior month. Goods producing industries saw a 0.2% drop in output, as declines for construction (-0.2%), manufacturing (-0.8% largely due to autos), and mining/oil&gas support (-15.4%), more than offset increases for mining (+3%), oil and gas (+0.1%), agriculture (+1.1%) and utilities (+2.3%). Industrial production fell 0.4% as a result. The services sector's output rose 0.1% as gains in retailing, real estate, education and health more than offset declines in wholesaling and accommodation/food services.

All told, the lack of growth in February was partly due to temporary factors such as atypically bad weather and auto plant closures in Ontario. As such, one can expect a rebound in growth soon. Still, given the poor start to the quarter, Q1 GDP growth is likely to be no better than 0.5% annualized, the worst performance in over three years.

The Survey of Employment, Payrolls and Hours (SEPH), a survey of establishments (unlike the Labour Force Survey which surveys households), showed that Canada gained 4K jobs in February. Weekly earnings rose for the third straight month, taking the year-on-year wage growth to 2.7%. Annual wage growth topped the national average in sectors like transportation/warehousing, finance/insurance, mining/oil/gas, utilities, manufacturing, management, real estate, and health care. Sectors including public admin, arts/entertainment, information/culture, construction, and accommodation/food services had annual wage growth below the national average in February.

The SEPH has averaged 13K jobs/months over September- February, roughly in line with the LFS whose paid component averaged 15K/month for the same 6-month period. While not stellar, that’s not atrocious either. The SEPH shows hours worked falling slightly in Q1, consistent with a weak GDP print in the quarter. Atypically bad weather and auto plant shutdowns temporarily limited output and hence hours in the first quarter. Wages, however, are on track to grow at an annualized pace of over 5%, the best in several quarters.

United States – The Bureau of Economic Analysis’ advance estimate of Q1 GDP growth came in at just +0.2% annualized. Trade was a drag on the economy due to contracting exports. Domestic demand was also very soft with weak consumption growth (the worst since Q1 last year), weak residential investment (also worst since Q1 last year), a sharp contraction of business investment in structures (the worst since Q1 of 2011), and another drag from government. Inventories contributed significantly to growth. So, final sales, i.e. GDP excluding inventories, contracted 0.5%, the worst performance since Q1 last year. Nominal GDP grew at an annualized pace of only 0.1%, the worst since Q1. While disappointing, it’s clear that Q1 results were impacted by temporary factors such as bad weather (which affected consumption and construction) and the port strikes on the West Coast (which hurt exports). As those factors dissipate, expect a rebound. That said, the inventory accumulation in Q1 will put a speed limit on Q2 growth.

Personal income was flat while personal spending was up 0.4% in March. With spending rising faster than income, the savings rate fell to 5.3%. In real terms, disposable income was down 0.2% while spending rose 0.3%. The PCE deflator was up 0.2% in March, allowing the year-on-year rate to remain unchanged at 0.3%. The core PCE deflator rose 0.1%, allowing the annual core rate to remain unchanged at 1.3%.

Construction spending fell 0.6% in March after a flat print in the prior month (which was previously reported at -0.1%). The residential sector saw a 1.6% decrease while the nonresidential sector was down -0.1%.

The 20-city Case-Shiller home price index rose 0.9% on a seasonally-adjusted basis in February, the sixth increase in a row. That helped push the 20-city annual home price inflation rate to 5%. On a three-month annualized basis, the 20-city index is growing at an annualized pace of 11.5%, the highest since late 2013. San Francisco leads the pack with 3-month annualized gains of 24.5%, while Las Vegas is at the bottom of the 20-city list with gains of 4.3% annualized.

The Conference Board’s consumer confidence index fell to a four-month low of 95.2 in April, from an upwardly revised print of 101.4 in the prior month. The decline in confidence was due to perceptions about both economic prospects (sub-index dropping to a 7-month low of 87.5) and the present situation (sub-index falling to a 4-month low of 106.8). Consumers were less optimistic than in the prior month about prospects for both employment and income. They were also less enthusiastic than in the prior month about buying autos and major appliances.

The ISM manufacturing index was unchanged at 51.5 in April. The new orders and production indices both rose a bit and remain well in expansion mode, while the employment index fell below 50, i.e. contraction territory, for the first time since May 2013. Interestingly, new export orders rose above 50 for the first time in four months.

Weekly jobless claims data for the week of April 25th showed initial claims falling to 262K. The more reliable 4-week moving average fell to 284K. Continuing claims for the prior week fell 74K to 2.25 million.

The Fed left monetary policy unchanged at its April meeting. The fed funds rate remains in the 0-0.25% range and the policy of reinvesting principal payments from its holdings was also left unchanged. The Fed acknowledged the weak Q1 GDP results but, not surprisingly, thought this was “in part reflecting transitory factors”. The FOMC still sees risks to the outlook for economic activity and the labor market as nearly balanced and accordingly expects the economy to “expand at a moderate pace” on the back of “appropriate monetary policy”. With regards to inflation, the Fed now more explicitly mentions the impact of the strong USD via import prices. While the Fed expects inflation to remain low over the near term, it still sees it rising toward 2% over the medium term “as the labor market improves further and the transitory effects of declines in energy and import prices dissipate”. There was no dissent within the FOMC with regards to the decision.

World – In the Eurozone, the first estimate of April CPI put the annual inflation rate at 0.0%. The annual core inflation rate, i.e. all items excluding energy, food, alcohol and tobacco was unchanged at 0.6%. The zone’s unemployment rate was unchanged at 11.3% in March as declines in Spain, Ireland, the Netherlands offset increases in Italy and Austria. The jobless rate was unchanged in Germany (4.7%) and France (10.6%). The Bank of Japan left monetary policy unchanged with an 8-1 vote in favour of continuing with the ¥80 trillion/year asset purchase programme. March data in Japan showed monthly drops of 1.9% for retail spending and 0.3% for industrial output, while housing starts were up slightly in the month. CPI data, also for March, showed the annual inflation rate, excluding the impact of the sales tax, rising to 0.2%.