Chief Economist Eugenio J. Alemán discusses current economic conditions.
The U.S. economy seems to be surviving on fumes today; that is, a strong Q2 print will show a very strong economy just because importers bought everything under the sun during the first quarter of the year, and the retrenchment during the second quarter is undoing the damage done to the economy during the first quarter. However, there was very little in today’s report that could be translated into “the economy remains strong,” as argued by Chairman Powell during the press conference after the June FOMC meeting.
It is true that personal income was much better than personal consumption, as a one-off increase in government transfers in April pushed this measure down in May. This one-off was the biggest reason for the decline in disposable personal income in May and is expected to recover in June, provided that employment remained strong during the month. We will know this on Thursday of the coming week. But for now, the reversal in net exports during the second quarter of the year will give markets some reasons to remain positive on the prospects of economic activity.
However, the weakness observed during the first and second quarter of the year in personal consumption expenditure and after the publication of the final revision to real GDP during the first quarter of the year, is going to put economic growth on thin ice during the third and fourth quarter of the year. Our forecast already includes these assumptions, but it means that the economy will remain fragile during the second half of the year. Thus, the importance of the labor market will remain key for economic growth during the rest of the year.
Short week but potentially consequential for the economy
Next week is a shortened week, but the data could be consequential for decision makers, both in the markets and especially for monetary policymakers. Less than a week after the FOMC’s unanimous decision on rates in June, two Federal Reserve Governors indicated that they could be in favor of a rate cut as soon as July. Of course, they qualified their view by adding “if inflation continues to behave and/or to prevent further weakening of economic activity.” Whether they are pitching in to compete for the Fed Chairman position next year or because they really believe what they are saying, that’s a different issue.
As the July Federal Open Market Committee meeting approaches, Chairman Powell’s job is going to become more difficult, as he tries to direct his colleagues toward another unanimous decision, one that probably does not include a reduction in rates. However, by then, we will probably have more clarity on tariffs, plus one more inflation report, as the July 8 tariff extension period ends. It is also possible that the tariff decision is extended. Thus, there is plenty of time for other Fed members to join the July interest rate reduction bandwagon. We still believe that this is an unlikely event, but we will have to wait for more clarity. The July FOMC meeting is scheduled for July 29-30. Furthermore, the next meeting of the FOMC does not occur until mid-September, so a lot of things can happen during the summer that could put even more pressure on FOMC members to act.
But before getting there, next week we will get several important data points that have the potential to change markets’ expectations as well as policymakers’ minds. On Tuesday, we get the ISM Manufacturing PMI, which we expect to have remained in contraction but very close to the 50-demarcation point between contraction and expansion. This is going to give us some more clues on the industry’s prospects going forward, as we saw a very strong durable goods orders number during May, which has the potential to move the needle for the manufacturing industry.
On Thursday, we have several very important data releases, with nonfarm payrolls, the unemployment rate and the ISM Services PMI. We expect nonfarm payrolls to come in at 120k while the ISM Services is expected to have gone into expansion in June after falling below the 50-demarcation point in May. If either of these data points is weaker than the markets are expecting, there could be increased noise regarding the future of economic activity.
Economic and market conditions are subject to change.
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Consumer Price Index is a measure of inflation compiled by the US Bureau of Labor Statistics. Currencies investing is generally considered speculative because of the significant potential for investment loss. Their markets are likely to be volatile and there may be sharp price fluctuations even during periods when prices overall are rising.
Consumer Sentiment is a consumer confidence index published monthly by the University of Michigan. The index is normalized to have a value of 100 in the first quarter of 1966. Each month at least 500 telephone interviews are conducted of a contiguous United States sample.
Personal Consumption Expenditures Price Index (PCE): The PCE is a measure of the prices that people living in the United States, or those buying on their behalf, pay for goods and services. The change in the PCE price index is known for capturing inflation (or deflation) across a wide range of consumer expenses and reflecting changes in consumer behavior.
The Consumer Confidence Index (CCI) is a survey, administered by The Conference Board, that measures how optimistic or pessimistic consumers are regarding their expected financial situation. A value above 100 signals a boost in the consumers’ confidence towards the future economic situation, as a consequence of which they are less prone to save, and more inclined to consume. The opposite applies to values under 100.
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GDP Price Index: A measure of inflation in the prices of goods and services produced in the United States. The gross domestic product price index includes the prices of U.S. goods and services exported to other countries. The prices that Americans pay for imports aren't part of this index.
Employment cost Index: The Employment Cost Index (ECI) measures the change in the hourly labor cost to employers over time. The ECI uses a fixed “basket” of labor to produce a pure cost change, free from the effects of workers moving between occupations and industries and includes both the cost of wages and salaries and the cost of benefits.
US Dollar Index: The US Dollar Index is an index of the value of the United States dollar relative to a basket of foreign currencies, often referred to as a basket of U.S. trade partners' currencies. The Index goes up when the
U.S. dollar gains "strength" when compared to other currencies.
Import Price Index: The import price index measure price changes in goods or services purchased from abroad by U.S. residents (imports) and sold to foreign buyers (exports). The indexes are updated once a month by the Bureau of Labor Statistics (BLS) International Price Program (IPP).
ISM Services PMI Index: The Institute of Supply Management (ISM) Non-Manufacturing Purchasing Managers' Index (PMI) (also known as the ISM Services PMI) report on Business, a composite index is calculated as an indicator of the overall economic condition for the non-manufacturing sector.
Consumer Price Index (CPI) A consumer price index is a price index, the price of a weighted average market basket of consumer goods and services purchased by households.
Producer Price Index: A producer price index(PPI) is a price index that measures the average changes in prices received by domestic producers for their output.
Industrial production: Industrial production is a measure of output of the industrial sector of the economy. The industrial sector includes manufacturing, mining, and utilities. Although these sectors contribute only a small portion of gross domestic product, they are highly sensitive to interest rates and consumer demand.
The NAHB/Wells Fargo Housing Opportunity Index (HOI) for a given area is defined as the share of homes sold in that area that would have been affordable to a family earning the local median income, based on standard mortgage underwriting criteria.
Conference Board Coincident Economic Index: The Composite Index of Coincident Indicators is an index published by the Conference Board that provides a broad-based measurement of current economic conditions, helping economists, investors, and public policymakers to determine which phase of the business cycle the economy is currently experiencing.
Conference Board Lagging Economic Index: The Composite Index of Lagging Indicators is an index published monthly by the Conference Board, used to confirm and assess the direction of the economy's movements over recent months.
New Export Index: The PMI New export orders index allows us to track international demand for a country's goods and services on a timely, monthly, basis.
Gold is subject to the special risks associated with investing in precious metals, including but not limited to: price may be subject to wide fluctuation; the market is relatively limited; the sources are concentrated in countries that have the potential for instability; and the market is unregulated.
The Conference Board Leading Economic Index: Intended to forecast future economic activity, it is calculated from the values of ten key variables.
Source: FactSet, data as of 12/6/2024
