Thursday-Friday Data from the U.S. and Canada

May 31, 2019

U.S. first-quarter real GDP growth was revised down a tenth of a percentage point to 3.1% at an annualized rate from the prior quarter. This was the third time in four quarters in which growth was 3.1% or stronger. Over the eleven quarters following mid-2015, real growth didn’t exceed 3.0% even once. On the other hand, the composition of aggregate demand was far less than ideal. Personal consumption, which accounts for roughly 70% of GDP was responsible for less than a percentage point of last quarter’s GDP growth rate. Non-residential and residential business investment collectively contributed another 0.18 percentage points of the growth rate, and inventory building, which tends to bounce around, chipped in another 0.4 percentage points. The bulk of growth came from net exports and government spending, neither of which is a reliable source of demand upon which to base sustainable medium-term growth.

TheĀ  U.S. personal consumption price deflator had little pulse last quarter, rising just 0.4% at an annualized rate compared to the prior quarter. Compared to a year earlier, the PCE deflator and core price deflator were up by 1.4% and 1.6%, which continues to compare unfavorably with the Fed’s medium-term 2% target. Given the goal of applying the inflation target in a symmetrical manner, the case is building for welcoming a spate of quarters in which inflation averages somewhat greater than 2.0%, as that may be necessary to prevent a permanent ratcheting down of inflation expectations to a pace significantly below 2.0%.

One of the hallmarks of the U.S. economy in recent years has been a disconnection between labor market tightness and inflation. New jobless insurance claims averaged 216.75k over the latest four-week period and not far different from 121.5k during the four weeks to April 27th or 213.5k in the four weeks to March 30th. Set against 50 years of prior history, these are very low levels for this proxy of the job layoff rate.

Chicago’s regional purchasing managers index rose 1.6 points to 54.2 this month but remained well below this year’s high of 64.7 touched in February.

Trumpian protectionism hadn’t produced a tangible reduction of the U.S. trade deficit, nor according to orthodox trade theory will such ever do so on a sustained medium-term basis. But at least the drop in the deficit that occurred in March was mostly sustained in April according to the advance merchandise trade gap reported yesterday.

The U.S. housing market has cooled. Pending home sales in April fell 1.5% on month and 2.0% on year.

Personal income and consumption expenditures in the United States during April both grew faster (0.5% and 0.3%, respectively) than had been forecast, and the PCE price deflators posted somewhat higher 12-month increases. But at 1.5% overall and 1.6% for core personal consumption price index, inflation remains unduly below the Fed’s target and down from 1.8% and 2.0% at the end of 2018. Finally, consumer sentiment according to the revised U. Michigan/Reuters monthly index in May was 100.0, down from 102.4 reported on a preliminary basis two weeks ago but up from 97.2 in April and 91.2 in January. Households are more optimistic than early this year, but the unexpected re-escalation of trade tensions in the last two weeks of May partly reversed this improving trend.

Turning to Canada, real quarter-on-quarter GDP last quarter edged up only 0.4% expressed at an annualized rate. That’s barely more than the 0.3% annualized rate in the final quarter of 2018, suggesting that Canada came very close to meeting one definition of a recession. Net exports exerted a very large drag on Canadian growth in the first quarter, with exports falling 1% and imports rising 1.9%. Residential investment also contracted. The good news is GDP growth picked up at the end of the quarter. In March, industrial production rose 0.8%, service-sector activity went up 0.4%, and GDP measured from the supply side climbed 0.5%, the best month in either 4Q18 or 1Q19.

Canada’s current account deficit last quarter widened 4.4% to C$ 17.347 billion, equivalent to 3.1% of nominal GDP. That’s only a tad above the deficit ratio in the prior quarter and very similar to the average relative deficit size during the post-Great Recession period. It’s also larger than the average relative size that the U.S. current account deficit has been running lately.

The Bank of Canada scheduled policy review maintained a 1.75% overnight target interest rate and released a statement that observed CPI inflation hovering near its 2% target. Today’s monthly producer price report for April showed a 0.3 percentage point acceleration to 1.8%.

Copyright 2019, Larry Greenberg. All rights reserved. No secondary distribution without express permission.



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