We ended the second quarter with disappointing news from the first: that the US economy contracted at an annual pace of 0.7% during those first three months of the year.
By Peter Martin
Monday, June 1, 2015
As we begin the second half of the year, there are still some hurdles in place that may hamper growth, including a strong dollar and reduced investment by energy companies, though improvements in the labor market are likely enough for moderate growth. Data released this morning by the Commerce Department suggests tepid spending and inflation for the first part of the second quarter.
Though the health of the jobs market has helped swell incomes, consumers are choosing to save rather than spend: personal income rose 0.4% in April, while consumer spending was unchanged. The PCE price index, an inflation metric that is closely watched by the Fed, was also flat at the headline level and only rose 0.1% at the core level. Year on year the PCE price index was up just 0.1% in April, slowing from the 0.3% reported for March, the slowest annual change measured in more than half a decade. With inflation so far below target it is difficult to see how the Fed can push for a rate hike and unless we see prices warming up considerably in the next few months, we could see expectations for policy normalization pushed back into 2016.
Throwing an interestingly dovish notion into the mix, Fed vice chairperson Stanley Fischer said at a conference in Toronto on Monday that ‘we should not make the mistake of believing that we have put an end to financial crises’ and added that it is unclear whether we are in secular stagnation.
The manufacturing sector has been struggling to show any real momentum, though May’s final reading for Markit’s manufacturing PMI suggests the sector remains in expansionary mode. The index came in at 54.0 for May (compared to 54.1 in April), slightly better than expected, though exports dragged again and new orders grew at the slowest pace for 16 months. The ISM manufacturing index has dropped sharply in recent months, but showed improvement for May, rising to 52.5 from the barely-expansionary level of 51.5 recorded in April.
The overall tenor of economic news at the moment is mixed, with evidence of growth, but only a very modest amount. These are the kind of conditions that investors have tended to warm to over the last couple of years, with growth that is not robust enough to spur the Fed into action, and the stock market has reacted positively this morning: the Dow Jones rose 46 points or 0.26% to 18,057 shortly after the opening, while the S&P 500 Index gained 0.07%.
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