As we progress through 2018 we find eyes as ever turning regularly to the US economy. Not only to see what the world’s largest economy is up to but also to note any changes. The economic growth news for the first quarter was pretty solid. From the Bureau of Economic Analysis or BEA.
Real gross domestic product (GDP) increased at an annual rate of 2.3 percent in the first quarter of 2018
according to the “advance” estimate released by the Bureau of Economic Analysis. In the
fourth quarter, real GDP increased 2.9 percent.
So whilst we see a slowing it is exacerbated in feel by the way the numbers are annualised and is much lower than that seen in the UK and much of Europe. Also the US has developed something of a pattern of weak first quarter numbers so we need to remind ourselves that the number is better than that seen in both 2016 and 2017. As to the detail the slowing was fairly general. If we were looking for an estimate of the recovery since the credit crunch hit then we get it from noting that if we use 2009 as out 100 benchmark then the latest quarter was at 120.58.
Let us move on with a reminder of the size of the US economy.
Current-dollar GDP increased 4.3 percent, or $211.2 billion, in the first quarter to a level of $19.97
trillion.
Looking ahead
There was something potentially rather positive tucked away in the Income report that was released with the GDP data.
Disposable personal income increased $222.1 billion, or 6.2 percent, in the first quarter, compared with
an increase of $136.3 billion, or 3.8 percent, in the fourth quarter. Real disposable personal income
increased 3.4 percent, compared with an increase of 1.1 percent.
At a time of weak wages growth considering the economic situation that was a strong reading which may feed forwards into future consumption numbers. I wondered what drove it but in fact it was pretty broad-based across the different sectors with the only fall being in farm income. As an aside the personal income from farming was surprisingly small considering the size of the US farming sector at US $27.9 billion.
Moving onto the Nowcasts of GDP the news has also been good. From the Atlanta Federal Reserve.
The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the second quarter of 2018 is 4.0 percent on May 3, down from 4.1 percent on May 1.
They start the series in optimistic fashion so let us say that around 3% may well be where they end up unless something fundamental changes.
Moving onto the business surveys we saw this yesterday.
April survey data indicated a strong expansion in
business activity across the U.S. service sector.
However, although the rate of growth accelerated, it
remained below the series’ long-run average.
Meanwhile, the upturn in new business quickened
to a sharp rate that was the fastest since March
2015. ( Markit PMI ).
Which added to this from May Day.
April survey data signalled a steep improvement in
operating conditions across the U.S. manufacturing
sector. The latest PMI reading was the highest since
September 2014, supported by stronger expansions
in output and new orders. Moreover, new business
rose at the sharpest pace in over three-and-a-half
years. ( Markit PMI)
Thus the summary for the start of the second quarter is so far so good which again means the US is in better shape than elsewhere at least for now.
Inflation
Earlier this week I note that the US Federal Reserve was for once on target. What I mean by that was that the PCE ( Personal Consumption Expenditure) inflation rate rose by 2% in March compared to a year before. Expectations of this are what caused the addition of the word I have highlighted in Wednesday’s Fed statement.
The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal.
There has been a lot of debate over this much of it misinformed. Firstly central bankers virtually never mean it and secondly they are hinting at a possible run higher after a long period when it has been below the 2% target.
Such a likelihood was reinforced by the Markit PMI surveys.
On the price front, input cost inflation picked up in
April. The rate of increase was strong overall and
the second-quickest since June 2015. (services)Meanwhile, average prices charged rose at the
quickest pace since June 2011, with the rate of
inflation accelerating for the fourth successive
month. Survey respondents commonly noted that
higher charges were due to increased costs being
passed on to clients. (Manufacturing)
Of course having begun the process of raising interest-rates without the most common cause of it these days ( a currency collapse) the US Fed is not in that bad a place at least in its own mind should inflation overshoot the target in the summer. Although of course as I have pointed out before in terms of logic it should have been more decisive rather than dribbling out increases along the lines expected for the rest of 2018 by Reuters.
While the Fed left interest rates unchanged on Wednesday, it is possibly set to raise them by a total of 75 basis points this year.
King Dollar
This was summarised by Reuters thus.
In just two weeks the dollar has surged nearly four percent against a basket of the most traded currencies, erasing all the losses it had suffered since the start of 2018 .DXY.
Against a broader group of currencies, including those from emerging markets, the greenback is now in positive territory against half of them.
This brings us back to the topic of yesterday where the US Dollar rebound has hit the weaker currencies such as the Turkish Lira and the Argentine Peso hard. Following on from the change of heart of the unreliable boyfriend in the UK it has seen the UK Pound £ dip below US $1.36 and the Euro is below US $1.20.
Is this a return to the interest-rate differentials that had up to then been ignored? Maybe a bit but perhaps the reality is more that the modern currency trade seems to be to follow the economic growth and as we have observed above at the moment the US economy looks relatively strong.
Comment
So in terms of conventional economic analysis things look pretty good for the US economy as we stand. The danger might be highlighted this afternoon from the wages data in the non farm payrolls release. This is because rising inflation will chip away at real wages if the rate of wages increase stays at 2.7%. Of course that reminds us of the issue of the fact that wages growth is only at that level with an unemployment rate at 4% leading many economists to scrabble through Google searches trying to redact references to full employment at a higher rate.
Elsewhere there are potential concerns of which one is debt. Should growth continue on its current path then it will help the national debt withstand the pressure placed on it by the Trump tax plan. On the private-sector side though familiar fears are on the scene.
Yahoo Finance helpfully updates us with this.
They’re also safer than junk bonds, at least in theory, with lenders getting repaid before creditors when firms get into trouble
What could go wrong?
Finally in spite of the recent dollar strength the Yen has pushed its way back to 109 leaving me with this from Carly Simon.
Why does your love hurt so much?
Don’t know why
Notayesmanseconomics's Blog 
When you see that disposable income increased by $221 billion in a quarter, you start to realise just how big the US economy is. I wonder where the increase on its own would rank against other countries’ whole GDP
Have a great long weekend
At #19, below Netherlands and above Switzerland.
http://statisticstimes.com/economy/countries-by-projected-gdp.php
Great blog as usual, Shaun.
I like the way you underlined the word “symmetric” with regard to the US inflation target. Symmetry implies that the long term average inflation rate should be two percent or close to it. In fact, from January 2012 to March 2018, the annualized PCEPI rate of inflation has been 1.3% and even the core inflation rate as measured by the PCEPILFE has only been 1.6%. No-one should criticize the Us Fed for not practicing what it preaches. However it should be criticized for not preaching what it practices: a lower target rate of inflation is very much in order.
The Case-Shiller national HPI for February had an annual inflation rate of 6.3%, up from 6.1% in January. The urban centres with the strongest housing inflation rates were Seattle (12.7%), Las Vegas (11.6%) and san Francisco (10.1%), which were all central to the US housing boom and bust that led to the financial crisis. Zillow Real Estate Research has backcast a March inflation rate for the Case-Shiller index of 6.5%. By comparison, the US HICP for the total population, the inflation measure that most closely matches the UK CPI, was at 2.1% in March, up from 1.9% in February, so real housing prices in the US are increasing much more strongly than in the UK.
Hi Andrew and thank you
The symmetry issue is a fascinating one as in general central bankers are prone to ignoring overshoots in inflation as it is more than just a Bank of England disease. But of course as you point out in fact we have seen a long period where inflation has undershot its target and with all the QE we can hardly accuse them of not trying!
Of course the QE has raised asset prices as you highlight with the house price measures. A proper inflation measure in my opinion would therefore have told quite a different story. Oh what a tangled web……
Sean, US house prices are barely above their 2008 highs. Almost no inflation in 10 years.
hello Shaun,
so here we are ten year after the “stall” in the markets and the bail out of the TBTF Banks – with emergency interest rates for UK at least .
Now we have another major expansion of the money supply to boost the USA – will it work?
or be a damp fizzle ?
i have to admit I can’t figure it out with all the false figures bandied about – I sure there’s some hidden book keeping going on at the FED .
So yes this will hopefully pull the US and the rest of the world out – but sadly I think it will be short lived and a appointment -then what?
nobody will allow a crash – we’re not going back to the 1930s if it can be helped
stay tuned – and we have some free seats and popcorn on hand 😉
Forbin
Hi Forbin
Maybe they are waiting for the 2030s….
As to the US and it keeping the rest of the world going I suspect those days are gone but it will help with any slow down elsewhere. Unless of course we do end up with a trade war.
Why are interest rates still so low you ask, because of low money supply. again if you want high interest rates you need to have high inflation. and you get high inflation by increasing the supply of money. Let me put this into gold standard terms, if giant deposit of gold were suddenly found, don’t you agree that gold prices would come down? Which would mean prices in gold for everything else would go up, aka inflation. The reason we have low inflation now is that all the CBS are fighting based on the 1970’s inflation spike. Of course that was too high money supply, but today it is too low. The bottom line is you can’t complain about low interest rates without wanting higher inflation.
We have got high inflation, just central banks have chosen to ignore it.
House prices, food, now oil what else do you want to see inflate?
Come on, UK house prices are up less than 2% per year according to official statistics since 2008, if we included them in the official inflation rate it would lower it. Oil is below its 2008 peak of $114 bbl and it is fully included in the inflation statistics, likewise food.
This reminds me of that state banking association and ardent Trump-ite I heard recently telling us about how US growth was touching 3% and the Donald was cutting tax. When I asked about how a combination of tax-cutting, rising national debt, loose monetary policy etc. could avoid the problems of the late 80s, dot-com crash and particularly the 2008 crash, I was confidently assured that better regulation meant there would not be a problem. Aside from reminding me of exactly the same response from Barclays, this Yank had just told us that looser regulation, ie: getting rid of Dodd-Frank, so that capital reserves could be lent out.
All that is happening is that loose monetary policy has pushed asset prices as high as they will go, so there will now be fiscal loosening – when the US debt to gdp ratio already stands at 105%. It has taken US growth to 2.7%, but that is forecast to fall to 2.4% and then 2%. The Fed has admitted that the bulk of jobs being “created” are low-paid and often part-time in retail and hospitality, while house prices are rising at 6.7% against nominal wage growth of 5.4%. A recent Harvard study says 39m Yanks cannot afford their homes, albeit the price bubble is now said to be flattening off.
Of course, no-one can imagine where all this sort of thing might lead to ….
Meanwhile in the UK, the FCA is seeking to release 150k homeowners from high rate mortgages taken out before the crash and locked into the higher variable rate. These people have paid the mortgage regularly, but no longer meet the criteria to switch to lower rate fixed deals. So, the FCA is asking lenders to go easy on them so they can switch and save quite a lot. Ironically, commentators think this will not help many of them as most are former Northern Rock and Bradford & Bingley customers now with non-regulated companies, so we know what the real issue is there.
Sounds like Argentina was reading this blog yesterday about how small rate rise will not change much – they have just raised rates to 40%.
Hi David
Your reply reminds me of this. Quis custodiet ipsos custodes or as I prefer to translate it who regulates the regulators?
As to Argentina well they have entered the slippery slope I warned about and look where it has got them. We can be sure that it will be nobodies fault however, well apart from evil currency speculators
With regard to the junk bonds, it was of course famously rumoured that Jefferson Starship sang “We built this city, we built this city on high-yield bonds” at a private do thrown by (later convicted insider trader) Ivan Boesky.
I bet Grace was Slick.
You pulled a (white) rabbit out of the hat there……