- U.S. Q4 GDP expected to be weak due to continued inventory correction
- Final-Jan U.S. consumer sentiment index expected to be revised slightly lower but still show an increase from December
- Chicago PMI expected to show an increase but remain in contractionary territory
- U.S. employment cost index to remain steady at +0.6%
U.S. Q4 GDP expected to be weak due to continued inventory correction — The market is expecting today’s Q4 GDP report to decelerate to +0.8% (q/q annualized) from +2.0% in Q3. However, Q4 GDP will not be as weak as it looks on its face because the inventory correction from the buildup in the first half is expected to continue in Q4 and subtract from the headline GDP figure. In Q3, inventories subtracted -0.71 percentage points from +2.0% GDP figure, which means Q3 GDP would have risen by a more impressive +2.7% had it not been for the inventory correction.
Even aside from inventory shifts, however, today’s Q4 GDP report is expected to indicate a cooler economy since Q4 personal consumption is expected to decelerate to +1.8% from +3.0% in Q3. The GDP inflation measures are expected to decelerate as well with the Q4 price index falling to +0.8% from Q3’s +1.3% and the Q4 core PCE deflator falling to +1.2% from +1.4% in Q3.
Today’s expected weak U.S. Q4 GDP report will keep the markets on the lookout for whether the U.S. economy is losing momentum due to weak overseas growth and the petroleum recession. At this point, however, the markets are expecting steady U.S. GDP growth to resume in 2016 with a consensus for GDP growth of +2.5% in Q1, +2.2% in Q2, +2.4% in Q3, and +2.5% in Q4. On a calendar year basis, the consensus is for US GDP growth in 2016 to be unchanged from the +2.4% growth rate that was seen in 2014 and that is also expected for 2015.
Final-Jan U.S. consumer sentiment index expected to be revised slightly lower but still show an increase from December — The market is expecting today’s University of Michigan final-Jan U.S. consumer sentiment index to be revised lower by -0.3 points to 93.0 from the preliminary-Jan figure of 93.3. That would leave the final-Jan index up by +0.4 to 93.0 rather than the prelim-Jan increase of +0.7 to 93.3 from the December level of 92.6.
The stock market can chalk up a victory if U.S. consumer sentiment in January actually shows an increase from December considering all the turmoil in the world financial markets and the downward correction in the U.S. stock market. Normally consumers would take the downward correction in the stock market as a sign that U.S. economic conditions are deteriorating. However, consumers may be so pleased with falling gasoline prices that they are willing to overlook the weakness in stocks. It is difficult for consumers to miss the good news on low gasoline prices as they drive by gasoline station signs each day.
Still, U.S. consumers are not running out to spend their gasoline savings money, meaning low gasoline prices are not helping to boost retail sales much. Indeed, retail sales in December fell by -0.1% and rose by only a net +0.3% in Q4 as a whole. Retail sales excluding gasoline and automobiles in December eased to a 1-3/4 year low of +3.3% y/y.
Chicago PMI expected to show an increase but remain in contractionary territory — The market is expecting today’s Jan Chicago PMI index to show a +2.4 point increase to 45.3, reversing part of December’s sharp -5.8 point decline to 42.9. The Chicago PMI fell sharply by -13.3 points in Nov-Dec to a 6-1/2 year low of 42.9, suggesting that the Chicago area manufacturing sector is contracting. Meanwhile, today’s Jan Milwaukee ISM report is expected to show a small increase of +1.47 to 50.00, adding to December’s +3.19 point increase to 48.53.
Regarding national manufacturing confidence, the market is looking ahead to Monday’s Jan ISM manufacturing index, which is expected to show a small +0.3 point increase to 48.5, thereby reversing most of December’s -0.4 point decline to 48.2. The ISM manufacturing index has fallen for the last six consecutive months by a total of -5.3 points to post a new 6-1/2 year low of 48.2 in December. Meanwhile, the ISM manufacturing new orders index in December rose slightly by +0.3 points to 49.2 but remained below the expansion-contraction level of 50.0 for the second straight month. The U.S. manufacturing sector continues to show weakness due to the petroleum recession and poor overseas demand for U.S. manufacturing goods exports.
U.S. employment cost index to remain steady at +0.6% — The market is expecting today’s Q4 U.S. employment cost index, which is the broadest measure of employee costs, to show a +0.6% q/q increase, which would match the +0.6% increase seen in Q3. On a year-on-year basis, the ECI held at +2.0% y/y in Q2 and Q3.
In fact, the ECI has held very steady at an average of +2.0% over the past five years, which has been supportive for corporate profits. However, the U.S. unemployment rate has now fallen to an 8-year low of 5.0%, indicating a tighter labor market in which companies will progressively need to pay their employees more to keep them from leaving for greener pastures. Therefore, the ECI is likely to creep higher over the next few years, thus curbing corporate profits but providing support for consumer income and confidence.
