There were lots of important reports on the U.S. economy released this morning. First, data from the Department of Commerce showed that personal income for Americans increased by 0.4 percent ($69.8 billion) in April, in line with expectations and helped by a solid $37.2 billion gain in private wages and salaries. Consumer spending, which accounts for almost 70 percent of the U.S. economy (GDP), jumped by 1.0 percent in April, better than expected and the largest month-over-month gain in nearly seven years. Personal saving as a percentage of disposable personal income, i.e. the personal saving rate, fell to 5.4 percent last month from March’s upward-revised reading of 5.9 percent. Also in the report, the personal consumption expenditures (PCE) core price index, one of the Federal Reserve’s preferred measures of inflation in America, posted a year-over-year gain of 1.6 percent last month. This is little-changed from March and still below the Fed’s 2.0 percent “target.” Sophia Kearney-Lederman, an economic analyst at FTN Financial, added that “You definitely want to see that pickup in April to fit into the story of a second-quarter [GDP] rebound. Supporting the increase, we have seen strong payrolls and incomes coming up, we’ve seen vehicle sales rebound, and we saw housing had a pretty good month.”
Next, the Chicago purchasing managers’ index (PMI) from Market News International (MNI), a measure of regional business activity that is often viewed as an indicator for the overall U.S. economy, fell to 49.3 in May. This is worse than expected, the lowest print since February, and the 6th sub-50 (contractionary) reading in the past twelve months. Under the hood, most of the components that make up this indicator signaled contraction in May but the bulk of the weakness was due to a slowdown in production and new orders growth. Inventories also tumbled this month and 68.7 percent of surveyed managers said that they did not have plans to increase business investment over the next six months, both of which the report’s authors attributed to uncertainty about future business growth. Chief Economist of MNI Indicators Philip Uglow added that “Firms ran down stocks at the fastest pace for more than 6 years in May, and while a rebuilding over the coming months could support output, the underlying message appears to be that businesses are not confident about the outlook for growth.”
Elsewhere, the consumer confidence index from The Conference Board declined from April’s upward-revised 94.7 print to 92.6 this month, a 10-month low for the sentiment gauge and significantly worse than what analysts had expected. Several weeks of increases in the price of gasoline have clearly weighed on consumer optimism but surveyed Americans also appear cautious about the outlook for U.S. business and labor market conditions. Specifically, only 15.1 percent of consumer respondents expect business conditions to improve over the next six months, and just 12.8 percent anticipate a greater number of employment opportunities. Moreover, only 16.2 percent of surveyed Americans believe that their incomes will increase during the next six months.
Finally, data from the Federal Reserve Bank of Dallas showed that business activity in the southern region of the country slowed significantly this month. Specifically, the general activity index plunged from -13.9 to -20.8 in May, much worse than expected and the 17th sub-zero (contractionary) print in a row. The production index, a key measure of state manufacturing conditions, collapsed from +5.8 to -13.1 this month, the weakest reading in a year. Under the hood, wages and benefits expanded but measures of capacity utilization, new orders, shipments, capital expenditures, employment, and hours worked all deteriorated. One noteworthy comment from a surveyed business manager in Texas is that “The Obama administration's new rule on threshold level for determination of overtime pay will have a modest impact on compensation of some portion of our employee workforce. It does present problems as to whether we should characterize some employees as exempt when they do not have supervisory responsibility. Anecdotally, a prominent architectural firm we work with believes the new rule presents real problems to compensation of their workforce because they are constrained as to what fees they can charge for professional services and rely on young talent that work longer hours, talent they cannot afford to move into an exempt category. They will have to forgo employment of some young professionals to make their overall finances balance. This is an unsatisfactory outcome because the young talent need the experience, much like an internship, to gain the skill sets to justify higher compensation.”
Sources: Econoday, Bloomberg, Reuters, Twitter, ZH, Census Bureau, MNI, The Conference Board, Advisor Perspectives, FRBD, FRBSLPost author: Charles Couch