ECONOMY: SIGNS OF ECONOMIC RESILIENCE IN MAY

U.S. economic data improved in May on balance, even as investors battled a resurgence in U.S.-China trade tensions.

Leading indicators signaled low odds of a recession in the coming year. The Conference Board’s Leading Economic Index (LEI) rose 2.7% year over year in April. As a reminder, April’s reading was its slowest pace of year-over-year growth since February 2017. Still, the LEI is squarely in positive territory, which shows that leading data are signaling growth.

A second glance at first quarter gross domestic product (GDP) provided respite for investors fixated on negative headlines. GDP rose 3.1% in the first quarter, according to the first revision released May 29. Although headline growth was revised down, it was still the biggest first-quarter GDP gain since 2015, showing the U.S. economy remained resilient against trade and political headwinds [Figure 1]. Inventories and net exports still accounted for about half of first quarter GDP growth, a temporary boost that could reverse in future quarters. Consumer spending’s contribution was revised slightly upwards, and business spending’s contribution was cut.

April jobs data showed U.S. hiring hasn’t wavered amid global uncertainty and trade tensions. Nonfarm payrolls growth exceeded estimates, while the unemployment rate fell to a cycle low. A separate report showed nonfarm productivity rose at the fastest year-over-year pace since 2010 in the first quarter, showing U.S. companies are prioritizing boosting output with current labor [Figure 2]. First-quarter unit labor costs rose at the slowest pace of growth since the fourth quarter of 2013. Overall, the U.S. labor market remains robust for this point in the cycle, with few signs of overheating or slowing.

Consumer inflation remained well contained. The core Consumer Price Index, which excludes food and energy, increased 2.1% year over year, rebounding from April’s 13-month low. Core personal consumption expenditures (PCE), the Federal Reserve’s (Fed) preferred inflation gauge, rose 1.6% year over year in April, below policymakers’ 2% target.

Wage and producer price growth remained steady. Average hourly earnings grew 3.2% year over year in April, a level of growth that should continue to bolster consumer confidence and support consumer spending. The core Producer Price Index (PPI), which excludes food and energy prices, rose 2.5% year over year in April.

U.S. manufacturing continued to deteriorate last month as global demand softened amid trade tensions. The Institute for Supply Management’s (ISM) manufacturing Purchasing Managers Index (PMI), a gauge of U.S. manufacturing health, dropped to the lowest level since October 2016. Markit’s PMI ticked up slightly in April, but preliminary May data showed the gauge fell further, and it’s less than a point from contractionary territory (below 50).

Confidence gauges rebounded, fueled by strong U.S labor market conditions. The Conference Board’s Consumer Confidence Index jumped to a six-month high in May, according to preliminary data; however, the cutoff date was May 16, so the data likely didn’t capture much of the fallout after the latest trade flare-up. National Federation of Independent Business’s (NFIB) measure of business confidence climbed to a year-to-date high in April.

Consumer and business spending data weakened, even as sentiment showed signs of recovery. Retail sales slid 0.2% in April after posting its biggest monthly gain since Sept. 2017 in March. New orders of nondefense capital goods slid 1% in April.

More Patience

Fed members unanimously voted to keep rates unchanged at the conclusion of their May policy meeting. Fed Chair Jerome Powell repeated several times in his May 1 post-meeting press conference that further policy patience is appropriate. Powell attributed lower consumer inflation to transitory factors, noting that core PCE growth stayed close to 2% for much of 2018. Still, markets are increasingly positioning for a rate cut before year-end, even amid the Fed’s patient messaging and faith in the economy.

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