US Daily Economic Notes:International trade,non-mfg ISM and FOMC minutes headline the docket
Commentary for Wednesday: The May international trade deficit is expected todeteriorate based on information gleaned from the advance goods trade data.
These figures, along with business inventories, are key inputs into analysts’estimates of quarterly GDP growth. Despite a projected 4% increase ininflation-adjusted consumer spending, we estimate that real GDP grew just1.0% in Q2. This weakness is largely the result of inventory liquidation, whichwe estimate subtracted about 140 basis points (bps) off growth. Nonresidentialfixed investment is also expected to be soft, with equipment spending likely toreduce real GDP growth by another 50 bps. If our Q2 forecast is on the mark,the year-over-year growth rate of real GDP would decrease to 1.4% from 2.1%previously. The former is also our estimate for full-year growth. Recall that2012 was the worst post-recession year for real GDP growth (1.3%).
The non-manufacturing ISM survey is released this morning, as well. LastFriday, the June manufacturing survey was reported at 53.2. Thus, if the nonmanufacturingISM comes in at 53, as we expect, both series will have nearlythe same reading. The large gap that had existed between the two surveys hasclosed because the manufacturing ISM has risen while the non-manufacturingISM has fallen. The minutes of the June 14-15 FOMC meeting, released thisafternoon, should strike a relatively cautious tone, similar to Fed Chair Yellen’scomments from last month. However, the minutes may not be as dovish as thepost-meeting statement for a couple of reasons. One, policymakers likelyassumed some recovery in hiring given that their latest economic forecasts didnot differ meaningfully from those in March. Two, the median 2016 Fed dotstill projected two hikes by yearend. Thus, policymakers likely wanted to keeptheir options open with respect to potential rate increases later in the year.
We get the June ADP survey report, one of the better predictors of monthlyemployment, tomorrow. While last month’s large ADP miss highlighted itslimitations in forecasting job growth, the report could still impact our estimateof June nonfarm payrolls (+155k forecast vs. +38k previously), which arereleased on Friday. While roughly 35k returning Verizon strikers will boost theheadline, we expect the three-month moving average to slip to 105k from 116kpreviously—assuming there are no revisions. The three-month trend in hiringwas 282k as recently as December, when the Fed raised rates by 25 bps. Withjob gains slowing, it will be difficult for policymakers to raise rates. This is onereason why we envision a shallow path for the fed funds rate. For an in-depthdiscussion of interest rates, see “Structural weakness continues to stymie ratehikeprospects”, US Economics Weekly, June 30, 2016.
The unemployment rate is expected to drift up a couple of tenths (4.9% vs.
4.7%) due to a moderate rebound in labor force participation. The nonfarmworkweek should remain steady at 34.4 hours, while we project that averagehourly earnings (AHEs) will register a modest gain (+0.2% vs. +0.2%). If ourlatter forecast is correct, the year-over-year growth rate would rise a couple oftenths to 2.7%, the highest 12-month increase in AHEs since July 2009 (2.7%).
However, employee tax withholding receipts are up just 3% over the last year,so this tells us that underlying wage and salary gains are quite modest.
Consequently, we highly doubt that consumer spending will be able to repeatits projected strong Q2 growth performance.