We’ve just complete the second month of the second quarter, which means we’ll be getting a fresh round of economic data that may or may not confirm everyone’s fears that the US economy is slowing down.
Last week, we learned that GDP actually contracted in Q1.
This week, we get an update on the state of jobs and manufacturing in America.
Here’s your Monday Scouting Report:
Household formation will save us. We’re hearing from more and more economists and analysts that a pick up in America’s massive housing sector will play a critical role in stimulating economic activity, job creation, and earnings growth. Perhaps the most exciting report of late came on May 19 when we learned the pace of housing starts spiked 20.2% in April, exploding to an annualized rate of 1.135 million units. That was the highest level since November 2007. “Housing starts, the last piece of the recovery puzzle is in place,” Bank of Tokyo-Mitsubishi’s Chris Rupkey said that day.
On Friday, Gluskin Sheff’s David Rosenberg speculated this metric could go much higher: “The US housing market is set for a nice bounce here. Housing starts would have to rise 50% just to catch up with net household formation.”
A big part of this story is the massive millennial population. “[We] note that the millennial generation is entering age cohorts characterised by rapid household formation,” Morgan Stanley credit analyst Vishwanath Tirupattur wrote in May. “Coupled with continued gains in employment and wages, this further portends an increasing demand for shelter.”
One caveat here is that the bulk of these newly-formed households are being filled by renters, not owner-occupiers. Still, regardless of whose balance sheet is carrying that home, this boom in household formation is generating lots of economic activity. According to the National Association of Homebuilders (via FundStrat Global), building an average single-family home creates 2.97 jobs, and building an average rental apartment creates 1.13 jobs.
- Personal Income and Spending (Mon): Economists estimate income increased by 0.3% in April while spending rose by 0.2%. Here’s Wells Fargo’s Sam Bullard: “Aggregate weekly payrolls, a reasonably good indicator for private sector wages & salaries, increased a moderate 0.3% in April. This performance suggest nominal personal income will rise by a similar amount in April. Led by a slower pace of motor vehicle sales (-3.5% in April) and flat retail sales, the pace of personal spending is likely to pull back as well — our call 0.2%. Similar to the April CPI performance, the headline PCE deflator should edge up — our call 0.1% — while a stronger monthly gain should be seen in the core PCE deflator — our call 0.2%.”
- Markit Manufacturing PMI (Mon): Economists estimate this manufacturing index to register at 53.8 in May, down from 54.5 in April. Here’s Markit’s Chris Williamson: “Manufacturers reported their weakest growth since the start of 2014 in May, with the survey results adding to fears that the strong dollar is weighing on the US economy and hitting corporate earnings. Although falling only modestly, export sales have now dipped for two straight months, something not seen for two years and a far cry from the solid export performance seen this time last year. Overall order books are consequently growing at the slowest rate seen since the start of last year.”
- Construction Spending (Mon): Economists estimate spending increased by 0.7% in April. From Nomura: “Construction spending has failed to post a positive month-over-month change rate in 2015 as adverse weather conditions slowed activity to start the year. Private residential construction and public non-residential construction both declined in March, but the latter has been low since the second half of last year. Note that declining crude oil prices have also hurt construction activity related to gas and oil extraction projects.”
- ISM Manufacturing (Mon): Economists estimate this manufacturing index improved to 52.0 in May from 51.5 in April. From Barclays: “New orders and production picked up in April; however, other regional indicators of manufacturing activity have sent mixed signals so far in May. On balance, the domestic manufacturing sector continues to face headwinds from the lagged effects of a stronger dollar and lower oil prices. That said, the ISM has declined or been flat every month since October, and we look for a small bounce in May.”
- Auto Sales (Tues): Analysts estimate the pace of auto sales climbed to an annualized rate of 17.10 million units in May, up from 16.46 million in April. Bank of America Merrill Lynch economists are looking for growth: “After flat-lining for several months, we expect auto sales to have jumped to a solid 17.2mn saar pace in May. With winter doldrums well in the rearview mirror, and with consumers enjoying several months of relatively low gasoline prices, we see an improvement in vehicle demand. 17.2mn is slightly above the highs of this year (registered in March), and if gasoline prices remain subdued and consumer confidence continues to improve, we see further upside to vehicle sales ahead.”
- Factory Orders (Tues): Economists estimate orders fell 0.1% in April. From Nomura: “Factory orders have been weak since late summer, as various factors such as the strong dollar, low oil prices, bad weather and the West Coast port disruptions have slowed business activity. The decline in total durable goods orders in April sets a low baseline for factory orders.”
- ADP Employment Change (Wed): Economists estimate private US companies added 200,000 payrolls in May. Here’s Bank of America Merrill Lynch: “Initial jobless claims have trended lower since April, supporting continued improvement in the labour market. However, there is downside risk from goods-producers given that the employment indices of the regional manufacturing surveys fell across the board.”
- Trade Balance (Wed): Economists estimate the trade deficit contracted to $US44.0 billion after ballooning to $US51.4 billion in March. From Barclays: “The resolution of the West Coast port strike in mid-February led to a surge imports in March but only modest growth in exports. As a result, the monthly trade deficit reached the widest level since 2008. In April, we look for a reversal of this surge in trade activity with a decline in imports and further gains in exports. Monthly container traffic supports our expectation that the trade balance should return to more normal levels as the recent volatility dissipates from the data.”
- Markit Services PMI (Wed): Economists estimate this services index fell to 56.4 in May from 57.4 in April. Here’s Markit’s Chris Williamson: “The US economy looks to have grown at a healthy pace in May, providing further evidence that the rate of expansion has picked up from the weak start to the year. The resilience of domestic demand in particular helped encourage companies to take on extra staff at the fastest rate for almost a year.”
- ISM Non-Manufacturing (Wed): Economists estimate this services index fell to 57.0 in May from 57.8 in April. From BNP Paribas: “West coast ports are running more smoothly, following disruptions in the beginning of the year, spring has brought better weather, and exporters are seeing the dollar depreciate a bit, after significant recent appreciation. Still, sectors, such as retail and oilfield services, have had some subdued data of late.”
- Beige Book (Wed): At 2:00 p.m. ET, the Federal Reserve will publish its book of economic anecdotes. Here’s UBS’ Sam Coffin: “The Beige Book has provided little colour on recent swings in activity. Similarly to reports for January and March, the April report indicated that ‘the economy continued to expand across most regions.'”
- Initial Jobless Claims (Thurs): Economists estimate initial claims fell to 278,000 from 282,000 a week ago.
- The Jobs Report (Fri): Economists estimate US companies added 225,000 nonfarm payrolls in May as the unemployment rate held steady at 5.4%. Average hourly earnings are estimated to have increased by 0.2% during the period. Deutsche Bank’s Joe LaVorgna is more bullish than the Street: “We expect a +275k nonfarm payroll gain and a one-tenth decline in the unemployment rate to 5.3% … The main reason we expect a sturdy May payroll gain is the trend in jobless claims. The four-week average on initial claims was 266k for the May survey week. This compares favourably to a 285k reading during the April survey period. Aside from an identical four-week average during the April 2000 survey week, 266k was the lowest figure for any employment survey period going back to December 1973 (257k).”
- Consumer Credit (Fri): Economists estimate consumer credit balances increased by $US16.45 billion in April. From Nomura: “Non-revolving consumer credit growth accelerated last year (likely due to an increase in auto loans). However, revolving credit growth was slow, showing above-trend gains in only a few months. Revolving credit increased in March after falling in January and February. Households’ risk appetite remains tenuous, despite more favourable household finances. Sustained growth in revolving consumer credit would suggest that consumers are more confident about their finances and could provide a boost for spending going forward.”
The stock market is near all-time highs. The bull market is six years old, it’s been years since we’ve seen a 10%+ correction, and valuations are looking a bit high.
But are we in a bubble? Here what Yale economist Robert Shiller told Goldman Sachs: “I define a bubble as a social epidemic that involves extravagant expectations for the future. Today, there is certainly a social and psychological phenomenon of people observing past price increases and thinking that they might keep going. So there is a bubble element what we see. But I’m not sure that the current situation is a classic bubble because I’m not certain that most people have extravagant expectations. In fact, the current environment may be driven more by fear than by a sense of a new era. I detect a tinge of anxiety and insecurity now that is a factor in markets, which is quite different from other market booms historically.”
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