- G7 leaders try to get on the same page
- Transitory Q1 GDP report of +0.7% expected to be revised slightly higher
- Final-May U.S. consumer sentiment expected to remain strong
- Lackluster U.S. durable orders report expected
G7 leaders try to get on the same page — G7 leaders at their summit in Sicily on Friday and Saturday will continue the process of trying to formulate a common set of principles for working together, particularly on trade and climate change. On climate change, Mr. Trump will consult with other leaders at the G7 meeting and will then make a decision after he gets back to Washington about whether the U.S. will stay in the Paris climate agreement. That decision will, of course, have implications for energy stocks.
On trade, Treasury Secretary Mnuchin at the recent G7 meeting of finance ministers and central bankers made progress in trying to formulate communique language on trade. The Trump administration does not like the language used in past communiques that rules out protectionism. Mr. Mnuchin has said that the U.S. does not want to be protectionist, “but we reserve the right to be protectionist to the extent that we believe trade is not free and fair.” Mr. Mnuchin said the administration does not like the term “free trade” but prefers the terms of either “fair trade” or “reciprocal free trade.” In any case, communique language is of little importance compared with actions on trade.
The G7 meeting will mark the end of President Trump’s 9-day trip abroad. Upon his return home, Mr. Trump will have a full slate of issues to deal with including the 2018 budget, health care legislation, tax reform legislation, and the Russian investigation. Congress will be on recess next week for the Memorial Day holiday.
Transitory Q1 GDP report of +0.7% expected to be revised slightly higher — The market consensus is that today’s Q1 GDP report will be revised higher to +0.9% from +0.7%. The upward revision is expected to stem in part from an expected upward revision in Q1 personal consumption to +0.4% from +0.3%.
The Q1 GDP report was weak mainly because of nearly flat personal spending, which was dampened by weak utility demand with the warm winter, weaker vehicle sales, and possibly by political uncertainty. In addition, inventories subtracted a hefty 0.93 points from GDP, meaning Q1 GDP ex-inventories looked better at +1.6%. The good news in the Q1 GDP report was strong business investment, which contributed +1.62 points to Q1 GDP. The idea that the weak Q1 GDP report was due to residual seasonality, as opposed to just weak consumer spending, was downplayed by the Fed in the May 2-3 FOMC meeting minutes.
The Fed has said that it believes the weak Q1 report was due to transitory factors and that personal spending will recover in Q2. The May 2-3 FOMC minutes said that a pickup in personal spending this spring “would be more consistent with ongoing gains in employment, real disposable personal income, and households’ net worth.” However, the Fed is being cautious about consumer spending. The Fed also said in the minutes that “members generally judged that would be prudent to await additional evidence indicating that the recent slowing in the pace of economic activity had been transitory.”
Looking ahead, the market consensus is for GDP growth to recover to +3.0% in Q2, and then settle in around +2.3% for the second half of the year. The Atlanta Fed’s GDPNow is currently forecasting Q2 GDP at +4.1%, while the New York Fed’s Nowcast is forecasting Q2 GDP growth at only +2.3%.
Final-May U.S. consumer sentiment expected to remain strong — The market consensus is for today’s final-May U.S. consumer sentiment index from the University of Michigan to be revised slightly lower by -0.2 points to 97.5. That would leave the index up by +0.5 points from April rather the preliminary-May increase of +0.7 points. The index has risen by a total of +1.4 points over the last three months (Mar-May) and is just -2.2 points below the 13-1/3 year high of 95.5 posted in January.
U.S. consumer confidence remains strong due to the record highs in the stock market, the strong labor market, improved personal income, rising household wealth, and generally low gasoline prices. Consumers are also hoping for a personal income tax cut. The main negative factor is political uncertainty in Washington.
Lackluster U.S. durable orders report expected — The market consensus is for today’s April durable goods orders report to show a decline of -1.5% but a small increase of +0.4% ex-transportation. That would follow March’s report of +0.9% and unchanged ex-transportation. There is expected to be some good news on capital spending with a +0.5% increase in Apr capital goods orders non-defense ex-aircraft, matching March’s +0.5% increase.
Positive factors for U.S. manufacturing orders include (1) increased business investment in Q1, (2) the weaker dollar along with improved overseas economic growth, and (3) the steady improvement in U.S. oil drilling. The main negative factor has been the recent weakness in the U.S. auto sector.
Confidence about manufacturing orders has fallen in the past two months but remains fairly strong. The ISM manufacturing new orders sub-index soared to a 7-1/2 year high of 65.1 on post-election optimism, but then fell by a total of -7.6 points in March-April to 57.5. Still, the 57.5 level for the orders sub-index is a relatively strong level that indicates continued confidence about order inflows.
