This month, it seems that good news is bad news once again. A series of positive economic data (mainly stronger employment growth) lit up markets with fear that growth would rebound sharply in the summer months, just like in 2014, and that a better economic situation would likely push the Fed over the edge and force its first rate increase by September. Potential homebuyers are likely entering full panic mode as they scramble to get a deal done before that happens.
GDP: The first-quarter GDP growth rate was revised from a measly 0.2% to an outright decline of 0.7%. However, this decline was modestly better than the previous consensus forecast of a 1% contraction. Weather, port strikes, and a shifting energy market made a modestly slowing economy look worse than it really was. Second-quarter growth should look more like 2.5%–3%, as consumers rebound and net exports weigh less heavily on the data.
Employment: The U.S. economy added 280,000 nonfarm payroll jobs in May, surpassing the consensus estimate of 220,000. Certainly there was some help from the addition of summer jobs in some industries, but generally it was a very strong and clean report. The jobs data also exceeded the 12-month average of about 255,000 jobs per month. And like so many other data points, it appears that the economy is coming off its weather and West Coast port issues that temporarily depressed a wide range of economic statistics.
The job growth average for January through April was a mere 200,000 or so jobs per month, well below the annual average and a sharp falloff from a very strong autumn. Viewed on a year-over-year average basis, the jobs market has been consistently strong since September 2014. Private-sector employment has been growing at a rate of about 2.6%. Adding in the lethargic government sector, nonfarm payrolls have been expanding at a very healthy 2.3% rate.
Wages: While the market always focuses on the jobs number, wage growth is nearly as important. Month-to-month wage progression was also robust at a 0.3% monthly rate (3.6% annualized) and the year-over-year hourly wage growth rates also appear to be improving, although in a less dramatic fashion.
Consumption and Savings: Monthly consumption data looked stagnant in April. Consumers are not spending all of their real income growth (which includes investment and rent income) or wage growth. Whenever that gap has become that wide in the past, there has been a combination of a downward revision to earnings and an acceleration in consumer spending. We saw this very pattern last summer. Economists don’t believe that consumers have become prolific savers. Instead, the more likely reason may be a physical inability to spend money (poor weather, lack of imported goods) and a mismatch of when the GDP report suggests consumers are spending their money and when those bills are actually paid. (February’s nasty utility bills, which counted in February consumption reports, were likely paid in April, potentially dampening April retail sales and consumption reports, as well).
Housing: For a big change, all of the recent housing data showed a housing market that is accelerating across the board. Home price data, pending sales of existing homes, and new home sales all showed surprising strength and generally exceeded analysts’ expectations. An improving housing market is the linchpin to the economy maintaining its 2.0%–2.5% growth rate in 2015, even in the face of a decline in real GDP in the first quarter. A 3% direct impact on GDP may seem small, but if the sector can manage 15% overall growth, that would amount to a 0.5% contribution to GDP. While that may not sound like a lot, a 0.5% contribution in a world of 2.0%–2.5% growth is a big deal. (Housing’s contribution in 2014 was a mere 0.1%.) Also, demographics will continue to keep a lid on growth that is still not fully appreciated by the market.
Bijan Golkar is a Certified Financial Planner™ and licensed tax preparer with FPC Investment Advisory Inc. in the San Francisco Bay Area.
