Recent U.S. economic data has generally been positive. The very weak first quarter real GDP growth has been revised up from the initial estimate of 0.5 percent annualized, to 0.8 percent. We expect to see another minor upward revision to GDP on June 28. Consumer spending in April was strong, gaining 0.6 percent after accounting for higher prices, a significant support to Q2 GDP growth. We expect the current quarter to show a moderate rebound in real GDP growth, up to about 2.3 percent, supported by stronger consumer spending and less drag from the energy sector. In early June, the U.S. rig count increased for the first time since last August.
However, the May employment report from the Bureau of Labor Statistics landed with a thud. According to the BLS, only 38,000 net new payroll jobs were added to the U.S. economy in May, well below expectations. This could turn out to be an anomalous report, and it is reasonable to expect some bounce back in the June labor data, due out July 8. However, there is enough corroboration outside the June employment report to take the miss seriously. First, job growth in the ADP employment report has been trending down. We have been expecting a similar downtrend in the official BLS data. We could be seeing the start of a downtrend with the last two months of payroll data, when April saw a gain of just 123,000 jobs, followed by May’s very weak 38,000. Second, productivity growth has been very weak. Recent weak productivity growth has been an important debate topic amongst economists. University of Chicago economist Robert Gordon recently published a book focusing on productivity. U.S. productivity growth was just 0.6 percent in 2016Q1 versus 2015Q1. A pickup in GDP growth in Q2, plus weak hiring over the quarter, could mark the reset in productivity growth that some economists have been waiting for. Third, both the May ISM Manufacturing Index and the May ISM Non-Manufacturing Index showed employment sub-indexes below 50, indicating a contraction in employment for the month. As is often the case, the May employment report went in two directions at once, showing weak job growth combined with a noticeable step down in the unemployment rate, from 5.0 percent in April, down to 4.7 percent in May. Strong increases in the labor force have kept the unemployment rate stable near 5.0 percent since last September. In May, the labor force gains reversed, bringing the unemployment rate down despite weak hiring.
Timing is everything. The weak May employment report, released just 10 days before the upcoming Federal Open Market Committee meeting, over June 14 and 15, will likely keep an interest rate increase on hold. We still think that a fed funds rate increase for July 27 is on the table. But the economic data will need to be solid in front of that meeting. The upcoming BREXIT vote in the United Kingdom is also an issue for the Fed. The STAY camp is still ahead in the polls, but their lead is narrowing. A LEAVE vote is viewed as economically destabilizing in the near term for both the UK and the EU. Janet Yellen’s speech in Philadelphia on June 6 gave her an opportunity to set market expectations for the upcoming FOMC meeting. Her speech was generally positive, but highlighted several areas of uncertainty including the weak May employment data. Yellen’s optimistic but cautious speech was consistent with no rate hike in June, but also consistent with the possibility of a rate hike at the end of July if the data is supportive.
For a PDF version of the complete Comerica U.S. Monthly with additional commentary, tables, and charts, click here: USEconomicUpdate0616.