- U.S. Q1 GDP expected to be revised higher to +0.9%
- Final-May U.S. consumer sentiment index expected to be revised slightly lower but still show a big increase from April
- Yellen could comment on monetary policy today
U.S. Q1 GDP expected to be revised higher to +0.9% — The market is expecting today’s Q1 GDP to be revised mildly higher to +0.9% (q/q annualized) from the last report of +0.5%. The upward revision is expected to stem in part from an expected upward revision in Q1 personal consumption to +2.1% from +1.9%.
The GDP report showed that the U.S. economy in Q1 was being held up almost exclusively by consumers since consumers contributed +1.27 percentage points to GDP. By contrast, government spending contributed only +0.20 points, while there were subtractions of -0.27 points from business investment, -0.33 points from inventories, and -0.34 points from net exports.
Due to the importance of consumers to the current U.S. economic outlook, the recent April retail sales report of +1.3% was a particularly encouraging sign that consumers are busting out of their winter hibernation. The headline retail sales figure was boosted by a sharp +5.2% increase in April vehicle sales to 17.32 million units from 16.46 million units in March. However, retail sales excluding vehicle sales were also strong with a +0.8% increase. The question now is whether the surge in April retail sales was a one-time event or whether consumers will engage in a sustained increase in spending going into the summer. The other question is whether the surge in April retail sales will give businesses enough confidence about the U.S. economic outlook to continue to expand their labor forces and revive their investment spending.
Looking ahead, the market is expecting U.S. GDP to recover to at least +2.5% in Q2. Indeed, the Atlanta Fed’s GDPNow estimate is currently at +2.9%. Recent U.S. economic data caused the GDPNow model to boost its estimates for Q2 business investment and net exports. Moreover, the GDPNow model is forecasting that personal consumption spending will contribute a hefty +2.46 points to GDP in Q2, up from +1.27 points in Q1. The Q2 GDP report would be even stronger at +3.4%, but GDPNow is forecasting that the continued inventory correction will knock -0.5 points off GDP in Q2.
If Q2 GDP matches the current GDPNow estimate of +2.9% and if today’s Q1 GDP report is revised higher to +0.9% as expected, then the average growth rate for the first half of 2016 will be +1.9%, which is still a lackluster growth rate. Still, if the GDP momentum continues into Q3 and Q4, then the overall GDP growth for 2016 could still reach respectable levels. At present, the market consensus is for U.S. GDP growth of +2.3% in Q3 and +2.4% in Q4. On a calendar year basis, the market consensus is for U.S. GDP in 2016 to dip to +1.8% from +2.4% in 2015 but then improve to +2.3% in 2017.
Final-May U.S. consumer sentiment index expected to be revised slightly lower but still show a big increase from April — The market is expecting today’s final-May University of Michigan U.S. consumer sentiment index to be revised lower by -0.4 points to 95.4 from the early-May level of 95.8. However, the expected report would still produce a strong +6.4 point gain from April, not far below the preliminary-May gain of +6.8 points. The U.S. consumer sentiment index in early May was only -2.3 points below the 12-1/3 year high of 98.1 posted in Jan 2015.
U.S. consumer confidence improved in April due to the generally strong stock market, the continued rise in home prices (which boosts household wealth), historically low gasoline prices, and rising incomes. The question remains whether the jump in April consumer sentiment will be sustainable since the U.S. labor market weakened in April and since gasoline prices continue to creep higher.
Yellen could comment on monetary policy today — Fed Chair Yellen will speak today at Harvard University’s Radcliffe Day in “a conversation about her groundbreaking achievements.” The markets will be listening carefully to see if Ms. Yellen takes the opportunity to comment on monetary policy, perhaps either amplifying or downplaying the recent spate of comments by various Fed presidents warning of the increased chance of a rate hike at the June or July FOMC meetings. Any comments by Ms. Yellen during her scheduled speaking slot of 1:15-2:00 PM ET could spark some extra volatility in the markets since there will likely be a dearth of liquidity on the afternoon before the 3-day Memorial Day weekend.
The markets have significantly boosted the odds of a Fed near-term rate hike after last week’s hawkish comments by Fed officials, last week’s hawkish April 26-27 FOMC minutes saying that Fed members would consider a rate hike at the June meeting if the economy justified, and the recent spate of strong U.S. economic data.
In just the past two weeks, the federal funds futures market boosted the odds for a rate hike at the June 14-15 FOMC meeting to 28% from 4% on May 16 and for a rate hike at the July 26-27 meeting to 60% from 18% on May 16. Fed Chair Yellen will give a press conference after the June 14-15 meeting, which would normally increase the odds for a Fed rate change at that meeting and not at the July meeting, when Ms. Yellen will not give a press conference. However, the odds for a June rate hike are lower because that meeting comes just a week before the June 23 Brexit vote, which could produce chaotic European financial markets. July would be a safer bet for a rate hike and Ms. Yellen could still make whatever statement she wished after the meeting or even hold an impromptu press conference.
