First estimate of Q1 GDP growth was expected to be on the weak side, as Q1 has tended to be many times over the past decade. Still, residual seasonality in the series does not explain the very weak showing for personal consumption in the first three months of 2017. Personal consumption has been the driving force of GDP growth for much of the past two years as the commodity downturn, slower business investment and slower global economic growth weighed on other components of GDP, while the strong domestic labor force supported solid personal consumption. Given that, the 0.3% print for PCE could be cause for concern.
The Conference Board’s Consumer Confidence report earlier this week did decline slightly more than expected in April after hitting a cycle-high in March. Its current reading is the second highest. The University of Michigan Survey of Consumer Sentiment was also positive. Confidence has surged since the November election, particularly in the expectations component. Though the surge in attitudes has yet to translate to a surge in spending, consumers’ assessment of their present situation is encouraging, as consumers report favourable labor market conditions, which bodes well for future spending.
Residential investment was a bright spot in Q1 GDP. Housing has been one area in which soft data and hard data agree. The NAHB/Wells Fargo Housing Market Index has jumped since the election, and new homes sales have followed suit, rising to the second highest current-cycle pace in March. The rise in new home sales surprised consensus, which had expected a softer reading after February’s surge. Demand for housing is strong although the supply of homes for sale, particularly for lower priced homes, is lean and buyers face stiff competition. That competition was likely a contributing factor to the softer March print for pending home sales, which measures contract signings of existing properties.
Equipment spending was another bright spot in Q1 GDP as the recovery in business spending continues. Durable goods factory data this week showed solid shipments of core capital goods in March, which are a useful proxy for business investment in the GDP calculations. Core order capital goods orders did slow, which suggests a more moderate clip to start Q2.
The Trump administration turned its attention to tax reform this week, releasing an outline of a proposal it will send to Congress. Under the plan, seven tax brackets would be reduced to three, the corporate tax would be slashed to 15% from 35% and the deductibility of state and local taxes would be ended. Notably, the proposal does not include a border adjustment tax, a centre-piece of the House GOP tax plan.
Mexico has long been thought to be the focus of President Donald Trump’s ire on trade matters, but he surprised the markets this week by slapping levies of up to 24% on softwood lumber imports from Canada. For the past 35 years, there has been a trade dispute between the US and Canada on the commodity, which is mostly, used in-home building. Analysts see the imposition of tariffs as setting the tone ahead of talks on reforming the North American Free Trade Agreement. Trump said this week that he will not withdraw from NAFTA “at this time” after media outlets reported that his administration had drafted a preliminary executive order pulling the US out of the agreement.
The labour market report for April is due on Friday. The report for March was surprisingly weak – also taking into account the weather effects. The consensus models based on PMIs point to yet another weak jobs report, with an increase in employment of around 100,000. However, given that the report for March was very weak, the figures for April reflect some correction of these numbers. Hence, we expect total jobs growth of 170,000, with manufacturing contributing 15,000 and services 140,000. The estimate of job creation is a bit below consensus among analysts, probably because we do not expect as strong a correction of the March numbers as other analysts given that February was stronger than usual.
PCE inflation for March on Monday. However, these numbers will probably not attract very much attention, as we receive PCE inflation figures for Q1 later today, from which implicitly the monthly numbers for March can be calculated.
ISM manufacturing figures for April and final PMI manufacturing figures for April is due on Monday. Over the past few months, there has been a divergence between ISM, PMI and regional manufacturing indices. The preliminary PMI figures for April fell a bit back but the regional indices continued climbing higher. A further ISM fall is expected in April.
GDP growth in the first quarter was weaker than expected, at 0.3%, down from 0.7% in Q4 last year. The consensus expectation was +0.4%. Year-on-year growth in Q1 was 2.1%, versus 2.2% expected. Thus far, only details for the production side are available. According to the ONS, weaker growth in services was the main reason for slower GDP growth in Q1. Services contributed 0.23 percentage points to growth, while industrial production, construction and agriculture contributed 0.04, 0.01 and 0.00 percentage points respectively. Services grew by 0.3% in Q1, down from 0.8% in Q4. Growth was pulled down by consumer-focused industries, such as retail trade, accommodation and the trade and repair of motor vehicles. Increasing price inflation hampered retail trade and accommodation services. Transport, storage and communications industries also decreased in Q1. On the other hand, food and beverage service activities improved. Government and Other Services, business services and finance sectors also saw positive growth. Within production, aggregate manufacturing increased by 0.5% in Q1, due mainly to a large rise in the manufacture of motor vehicles industry. Construction output was up 0.2% in Q1, after growing 1 percent in Q4 last year.
The PMI manufacturing index is due on Tuesday and, given the increase in the corresponding index for the euro area, an increase to 55.0 from 54.2 is expected. The more important PMI services index is due on Thursday and it is expected to be more or less unchanged at 55.0, as suggested by the services confidence indicator.
The European Central Bank surprised markets by maintaining a more dovish tone than many had expected. Bank president Mario Draghi allowed that downside economic risks had diminished, but he offered no hints as to whether or when the ECB will begin to dial back its asset purchases. Draghi said the recent inflation uptick was probably temporary and that underlying pressures are likely to remain subdued.
In the euro area, the first release of interest is the euro area unemployment rate, due to be released on Tuesday. The unemployment rate continued its decline in February, showing a figure of 9.5%, down from 9.6% in January. The strong activity indicators in March, noting in particular a strong PMI employment indicator, point towards a further decline in the unemployment rate.
On Wednesday, the figures for Q1 GDP growth for the euro area re released. Throughout Q1, there has been strong activity indicators, with the PMIs and IFO notably climbing to levels not seen since 2010. Therefore, 0.4% quarterly growth for Q1 is likely.
Thursday sees euro area retail sales for March released. There have been monthly increases in both January (0.1%) and February (0.7%) and several elements point to solid retail sales in March. Consumer confidence climbed from -6.2 in February to -5.0 in March, while the oil price saw a considerable decline in March, supporting higher retail sales. However, the retail figure for February was solid and it means it is unlikely March was as strong. Therefore, a marginal monthly decline of 0.1% is expected. This is supported by the German figure released earlier today, which showed a monthly increase of 0.1%.
The Bank of Japan indicated it would maintain its present ultra-loose monetary policy amid signs of slightly stronger domestic growth but still-very-low inflation.
The economy is expected to lose steam in 2017 and there could be more evidence of this in the PMI data. Global metal markets have weakened recently, giving some support to this view (China consumes 50% of global metals). There could be a small decline in NBS manufacturing PMI from 51.8 to 51.6 and in the private Caixin PMI manufacturing from 51.2 to 51.0. Why is China set to slow? The main reason is slower growth in infrastructure investment and construction since China moved the foot from the gas pedal to the brake over the past six months.
Sources: Wells Fargo, Danske Bank, MFS Investment Management, Handelsbanken.