There were a few important reports on the U.S. economy released this morning. First, data from the Bureau of Economic Analysis (BEA) showed that U.S. gross domestic product (GDP) growth slowed in the first quarter of 2016, albeit less so than previously estimated. Specifically, real GDP, which measures the value of the production of goods and services in America adjusted for price changes (inflation), increased at an annual rate of 1.1 percent in Q1. That is down from 1.4 percent in the fourth quarter of 2015 but 0.6 percentage points higher compared to the initial estimate from the government and a slightly better upward revision than most economists had anticipated. The improvement in the final revision was largely due to stronger trade (net exports), helped by U.S. dollar weakness in Q1, and a smaller overall decline in nonresidential fixed investment last quarter. The important personal consumption component (consumer spending) expanded by 1.5 percent in Q1, down from the prior estimate of 1.9 percent and the weakest consumer spending growth recorded in two years. Altogether, this was another sluggish start to a year for the U.S. economy but many analysts remain hopeful that the recent pattern of weak Q1 GDP growth being offset by a rebound in subsequent quarters will continue to hold true in 2016. For example, the Federal Reserve Bank of Atlanta currently projects that the economy will have grown by 2.6 percent in the second quarter, in line with recent history (second chart below).
Next, a report from the Federal Reserve Bank of Richmond showed that manufacturing activity in the Mid-Atlantic region of the country continued to slow this month, with the composite index declining from -1.0 to -7.0. That is the lowest headline reading since January 2013, the largest expectations miss in two years, and the second negative (contractionary) reading in a row. Under the hood, shipments improved this month but measures of new orders, capacity utilization, vendor lead-time, total employment, hours worked, and wages all deteriorated. Surveyed managers’ expectations for business activity over the next six months also worsened in June but capital expenditure plans encouragingly lifted. Altogether, this was a generally disappointing report that adds to the recent influx of mixed regional manufacturing data and therefore suggests that it is still too early to tell whether the “industrial recession” in America that started last summer has finally ended.
Elsewhere, the consumer confidence index from The Conference Board jumped from May’s 92.4 print to 98.0 this month, significantly better than expected and the highest reading of 2016-to-date. Surveyed Americans were found to be less negative about current business and labor market conditions in June, driven by large gains among lower income consumers, but 23.3 percent of respondents still believe that jobs are “hard to get” right now. Optimism about the future, though, improved this month, with 14.2 percent of consumer respondents expecting there to be more job opportunities available over the next half a year, and 18.2 percent anticipating wage growth. However, reported plans to buy a home, major appliance, or a car all slid this month, with the latter perhaps influenced by the Q2 spike in the price of gasoline. There also appears to have been an age-related divergence in sentiment this year, with optimism turning broadly lower for Americans over the age of 55 during the past six months but higher for consumers under the age of 35.
Sources: Econoday, Bloomberg, Twitter, ZH, U.S. Census Bureau, FRBR, Advisor Perspectives, The Conference Board, FRBSLPost author: Charles Couch