US Week Ahead: FOMC, GDP, ISM, PCE, ECI, Cons Conf, UMich Sent, Housing
The Conference Board consumer confidence index likely rose to 102.8 in April from 101.3. We expect consumer confidence to inch higher in April, rising 2½ points to 102.8, just under the post-crisis high of 103.8 reached in January. We expect the upward move to reflect an ever-strengthening labor market, which modestly stalled in March. As the economy emerges from a weak first quarter, labor market activity will show signs of renewed vigor, in our view. Consumers’ current job assessment (the proportions viewing jobs plentiful vs. hard to get) will be especially indicative of whether or not the labor market losing steam. But we bear in mind that the trend of these indicators is more useful than month-to-month movements, and in the March report they maintained levels consistent with solid labor market progress.
We expect real GDP growth to slow to a 1.4% annual pace in the Q1 2015 advance release. The harsh winter weather and impact of the West Coast Ports disruption led Q1 growth to slow to 1.4% vs. a 2.2% advance in the fourth quarter of 2014. We believe that consumer spending dipped below a 2% rate after a heady 4.4% advance in Q4. Fixed investment also slowed as business capital spending in oil exploration turned down. Net exports remained a drag on growth; however, the subtraction from the Q1 growth pace was likely less than in Q4 when net exports cut 1 full percentage point from growth. We look for Q2 real GDP growth near 2.7% bolstered by a rebound in consumer spending.
Pending home sales likely fell 1.4% in March after solid growth in the prior two months. We expect sales of pending homes to retrace in March and fall 1.4% following two steady increases. The pending sales series, pertaining to signed contracts that have not closed, has become noticeably dislocated from existing home sales, or closings, which has trailed behind in recent months. The deeper than expected decline in March new homes sales also points to a drop as the two sales series track on a month-to-month basis.
The Fed kept rates on hold at the April meeting, as widely expected. The April FOMC meeting is expected to be relatively uneventful. In the March FOMC statement, the Committee judged that “an increase in the target range for the federal funds rate remains unlikely at the April FOMC meeting.” Employment data released after the March FOMC were disappointing and Q1 activity data point to a winter slowing in the pace of real GDP growth. We believe that the Fed will want to see convincing evidence that transitory factors were behind the slowdown and that the underlying fundamentals suggest that the expected Q2 growth rebound will be sustained in the second half. As we see some risk for lingering downward pressures on core inflation measures from a stronger dollar, the Fed may need more time before it is reasonably confident that inflation will return towards 2% over the medium term. We along with most analysts do not expect the FOMC to begin rate normalization until September.
The Employment Cost Index (ECI) likely posted a 0.6% quarterly increase for Q1, with the pace of growth picking up to +2.5% YoY. We expect the ECI to increase 0.6% in the first quarter, suggesting a 2.5% YoY pace in Q1, up from +2.2% YoY in the previous two quarters and marking the strongest growth rate since 2008. The increase reflects firmer growth in the wages and salaries sub-index, which compose 70 percent of the ECI. Many encouraging developments on the wage front in Q1 support this call. Average hourly earnings posted a 0.7% quarterly increase—the strongest since the crisis. Surveys have exhibited significant improvement; in particular, the Rutgers new hire wage index for the services sector rose over 8 points in Q1 to a post-recession high. We expect the remaining 30 percent of the ECI, worker benefits, to slow to a 0.5% rise in Q1. Prices for medical care services saw softer growth in that quarter, rising 0.4% compared to +0.6% in Q4 of last year. We note that the Obamacare employer mandate, effective January 1 for firms with more than 100 employees, may boost the benefit index this year. The mandate requires employers to provide health insurance, or pay a fee, and kicks in next year for firms with 50-100 employees. We do not expect a big impact as many businesses may divert the insurance mandate by either paying the fee, reducing its employee count to avoid the threshold or hiring more part-time workers. Other businesses may have acted pre-emptively prior to the implementation date, such that the effects may be spread across prior quarters. All in all, we believe the Q1 ECI release will provide additional evidence that wage growth is picking up, in line with falling unemployment and robust job growth.
The headline and core PCE deflators likely both rose 0.2% in March, matching the increases in the CPI. We look for a 0.2% rise in the headline PCE price index in March, suggesting a firming in annual PCE inflation to +0.4% YoY from +0.3% YoY. Core PCE likely rose 0.2%, in line with the March core CPI, suggesting stable core CPE inflation of +1.4% YoY. The latest CPI report revealed that core domestic inflation is displaying resilience to disinflationary pressures from a stronger dollar over the past two months. Moreover, price components most vulnerable to import price passthrough (e.g., ex-energy ex-food commodities such as apparel) rebounded strongly in March following month-on-month declines. While we project stable core PCE inflation in March, our inflation outlook remains cautious given the persistent declines in import prices and further expected dollar appreciation in the near term.
March personal income growth likely slowed to a 0.2% rise while personal spending rose 0.5%. Personal nominal income likely rose 0.2% in March following a 0.4% increase in February. Income likely softened in March on weak hours data (down 0.2%), offset by a 0.3% rise in average hourly earnings. Nominal spending likely strengthened to a 0.5% increase after dismal prints in the prior 3 months. Driving the rebound is durable goods spending, highlighted by the 5.6% jump in light vehicle sales. Spending on nondurables likely saw an increase in line with the 0.4% rise in ex-auto retail sales, while services spending likely saw a modest pickup. In the latter we see downside risk drawing from the plunge in energy services prices, while fell by 1.5% in March. Our projected 0.5% overall rise in personal spending is an encouraging pickup but not enough to strongly offset the weakness in the prior two months. Thus, the March figure would support our projection of a slowdown in Q1 consumer spending to under 2.0%.
ISM manufacturing PMI likely posted a modest rebound to 52.0 in April. We look for a 0.5 point rebound in the ISM manufacturing PMI to 52.0 in April. Regional manufacturing surveys so far do not suggest a sharp bounce back in the index, which has fallen a cumulative 6.4 index points since October. The weakening in activity reflects three main factors: the stronger dollar which has impacted sales abroad, soft oil prices affecting oil and gas related business, and winter weather. The April Beige Book provided further evidence of dampened activity due to these transitory developments. We believe that these effects lingered into April. Indeed, the regional surveys, Philly Fed and Empire State, showed a mixed picture this month. Empire plunged to a sub-zero level, indicating a contraction, while Philly Fed rebounded a few points but several forward-looking sub-components remained weak.
March construction spending likely bounced back with a 0.7% increase.Construction spending likely rebounded by 0.7% in March following back-toback declines. The weakness in the previous months was weather related in our view, and we look for greater spending on both private residential and non-residential units. Private residential construction likely contributed to the increase given the 4.4% rise in single-family housing starts.
The University of Michigan (UofM) consumer sentiment survey likely came in at 96.4 in April, slightly above its preliminary reading. We expect a final reading of 96.4 in the April UofM sentiment index, confirming a more than 3-point gain since March. The final print would more than reverse the March dip and run just under the January peak of 98.1. Driving the sentiment gains in the preliminary index was likely greater enthusiasm over spending habits, as indicated by the sharp improvement in the Bloomberg’s buying climate index to 14-year highs. US equities rebounded from a dip in mid-April and remain elevated above levels at the end of March. Modestly higher gas prices in recent weeks were probably not enough to disturb sentiment. We will more interested in consumers’ long-term inflation expectations, which unusually slipped to 2.6% from 2.8% in the preliminary survey. The drop was accompanied by a drop in short-term expectations as well. The Fed will likely overlook these declines, and the rising path in gasoline prices will likely undue the blips.
