Economic Overview Q1 2018 Quarterly data is as of March 31, 2018 1 Monthly data as of March 31, 2018
Gross Domestic Product 2
Economic Overview GDP IS IMPROVING Real GDP Components and Percentage Net Exports Personal Consumption Expenditures Private Inventory Investment Government Expenditures Real GDP (RH axis) 20 10 $ in trillions 15 10 5 0 Recession 8 6 4 2 - (2) (4) (6) (8) Compounded Annual Percentage Change -5 (10) Source: U.S. Bureau of Economic Analysis/FRED Fourth-quarter (third estimate) Real GDP The third estimate for fourth-quarter real GDP came in at 2.9%, higher than the fourth-quarter (second estimate) of 2.5% and primarily due to upward revisions to personal consumption expenditures (PCE) and private inventory investments. First-quarter (second estimate) Real GDP The second estimate for first-quarter real GDP was 2.2%, 0.1% lower than the advance estimate and 0.7% lower than the second-quarter (third estimate). The increase reflected positive contributions from nonresidential fixed investment, PCE, exports, private inventory investment, federal government spending, and state and local spending that were partly offset by a negative contribution from residential fixed investment. Imports increased. The deceleration in real GDP growth reflected decelerations in PCE, exports, state and local government spending, and federal government spending and a downturn in residential fixed investment. These movements were partly offset by an upturn in private inventory investment and a larger increase in nonresidential fixed investment. Imports decelerated. The downward revision to the second estimate of GDP growth reflected downward revisions to inventory investment, housing investment, and exports. These were partly offset by an upward revision to business investment. 3
Prices 4
Prices: Consumer Price Indices CONSUMER INFLATION RISING BUT LONG-TERM TRAJECTORY REMAINS IN QUESTION Personal Consumption Expenditures (PCE) March s PCE has reached the Fed s target of 2.0% at 2.0%, year-over-year. Goods increased 0.3% due to nondurable goods increasing 1.7% and durable goods decreasing of 2.4%. When backing out food and energy, Core PCE remains at a rate of 1.9% year-over-year. The Food and Energy Indexes increased 0.4% and 7.9% year-over-year, respectively. Personal income and outlays increased 0.3% and 0.4% in March, respectively. Personal income increased primarily due to increases in wages and salaries, social security benefits, and dividend income. Personal outlays was driven by services but goods, specifically durable goods, posted the biggest percentage change month-over-month. Consumer Price Index (CPI) The all items index rose 2.4% for the 12 months ending March, compared to a 2.3% median annual increase over the past 25 years. CPI has posted gradual, continuous improvements since it s freefall in the first half of 2017 when it declined to 1.6%. Percent Chg. From Year Ago 5.0 4.0 3.0 2.0 1.0-1.0-2.0 Personal Consumption Expenditures (Chain-Type Price Index) Recession PCE PCE Less Food and Energy 2.0 1.9 On a month-over-month basis, the all items index declined 0.1% in March due to a drop of 4.9% in the gasoline index, resulting in the energy index falling 2.7%, which more than outweighed increases in the indexes for shelter, medical care, and food. The food index rose 0.1% with both the index for food at home and away from home increasing. The index for all items less food and energy rose 2.1% for the 12 months ending March, gradually increasing since September 2017 and the largest 12-month increase since February 2017. However, the index remains below the 2.2% median annual increase over the past 25 years. The energy index rose 7.0% over the past year while the food index increased 1.3%. Month-over-month, the index for all items less food and energy rose 0.2% in March. All major index components posted gains month-over-month except for the apparel, used vehicles, and commodities (less food and energy commodities) indexes. Percent Chg. From Year Ago Source: U.S. Bureau of Economic Analysis/FRED 6.0 5.0 4.0 3.0 2.0 1.0-1.0-2.0 Consumer Price Index Recession CPI CPI: All Items Less Food and Energy 2.4 2.1 Given the Fed officials views on current and projected inflation and employment, the Fed appears ready to continue it s rate hike trajectory for 2018. -3.0 Source: U.S. Bureau of Economic Analysis/FRED 5
Prices: Producer Price Indices PRODUCER INFLATION CONTINUES TO CLIMB Comp. Annual Percent Chg. Percent Chg. From Year Ago 5.0 4.0 3.0 2.0 1.0 - (1.0) (2.0) Source: U.S. Bureau of Economic Analysis/FRED 2 15.0 1 5.0-5.0-1 Producer Price Index PPI: Final Demand PPI: Final Demand Less Food and Energy Nonfarm Business Sector: Unit Labor Cost 3.0 2.7 2.7 Producer Price Index (PPI) The PPI for final demand increased 3.0% for the 12 months ending March (on an unadjusted basis). The foods index was up 2.0% and the energy index increased 8.5%. Final demand goods and services increased 3.2% and 2.9%, respectively. Month-over-month, the final demand index (seasonally adjusted) increased 0.3% in March. The increase in the final demand index is 70% attributable to a 0.3% advance in prices for final demand services. The index for final demand goods also climbed 0.3%. A major factor in the March advance in prices for final demand services was the index for outpatient care, which climbed 0.4%. The indexes for machinery, equipment, parts, and supplies wholesaling; cable and satellite subscriber services; airline passenger services; food and alcohol wholesaling; and hospital inpatient care also moved higher. In contract, margins for automotive fuels and lubricants retailing fell 10.4% The indexes for apparel, footwear, and accessories retailing and wireless telecommunications services also decreased. Over half of the March increase in the index for final demand goods is attributable to a 31.5% jump in prices for fresh fruit and dry vegetables. The indexes for chicken eggs, meats, unprocessed finfish, motor vehicles, and iron and steel scrap also advances. In contrast, prices for gasoline fell 3.7%. The indexes for primary basic organic chemicals and for fresh fruits and mellows also moved lower. The PPI for final demand less food and energy increased 2.7% year-over-year, on an unadjusted basis. The annual percentage change for the PPI s key rates continue to outpace consumer prices, which indicates margin compression for businesses until prices are passed on to consumers. Nonfarm Unit Labor Cost Unit labor cost increased 2.7% (preliminary) in the first quarter of 2018, reflecting a 3.4% increase in hourly compensation and a 0.7% increase in productivity. However, when the change in consumer prices was taken into account, real hourly compensation declined 0.1%. Unit labor costs increased 1.1% over the last four quarters. The manufacturing sector labor productivity rose 0.5% in the first quarter of 2018, as output increased 3.3% and hours worked increased 2.8%. Over the last four quarters, total manufacturing sector productivity increased 0.8%, as output increased 2.5% and hours worked increased 1.6%. Unit labor costs in manufacturing increased 2.7%. An overall unit labor cost of 3.0% and above is widely seen as feeding overall inflation. -15.0 Source: U.S. Bureau of Labor Statistics/FRED 6
Prices: Oil & Gas PRICES AND DEMAND INCREASING The U.S. Energy Information Administration (EIA) reported that U.S. crude oil production averaged 10.4 million barrels per day (b/d) in March, up 260,000 b/d from the February level. Total U.S. crude oil production averaged 9.3 million b/d in 2017 and the EIA projects that U.S. crude oil production will average 10.7 million b/d in 2018, which would mark the highest annual average in U.S. crude oil production level, surpassing the previous record of 9.6 million b/d set in 1970. EIA forecasts that 2019 crude oil production will again increase, averaging 11.4 million b/d. Dollars per Barrel 16 14 12 10 8 6 Crude Oil Prices: West Texas Intermediate (WTI) - Cushing, Oklahoma 62.7 Brent crude oil spot prices averaged $66 per barrel in March. EIA forecasts Brent spot prices will average about $63 per barrel in both 2018 and 2019. West Texas Intermediate (WTI) crude oil prices are expected to average $4 per barrel lower than Brent prices in both 2018 and 2019. NYMEX WTI futures and options contract values for July 2018 delivery that traded during the fiveday period ending April 5, 2018, suggest a range of $52 per barrel to $78 per barrel encompasses the market expectation for July 2018 WTI prices at the 95% confidence level. 4 2 Source: US. Energy Information Administration/FRED 4.5 4.0 US Regular All Formulations Gas Price For the 2018 April to September summer driving season, EIA forecasts U.S. regular gasoline retail prices to average $2.74/gallon, up from an average of $2.41/gallon last summer. The higher forecast gasoline prices are primarily the result of higher forecast crude oil prices. For all of 2018, EIA expects U.S. regular gasoline retail prices to average $2.64/gallon and gasoline retail prices for all grades to average $2.76/gallon, which would result in the average U.S. household spending about $190 (9%) more on motor fuel in 2018 compared with 2017. Dollars per Gallon 3.5 3.0 2.5 2.0 1.5 1.0 0.5 2.59 Source: US. Energy Information Administration/FRED 7
Employment 8
Employment WIDELY VIEWED AT FULL EMPLOYMENT The March unemployment rate was 4.1% for the sixth consecutive month and the number of unemployed changed little at 6.6 million month-over-month. 18.0 16.0 14.0 Unemployment and Underemployment Rate Recession Unemployment Underemployment The number of long-term unemployed (those jobless for 27 weeks or more) was little changed at 1.3 million in March and accounted for 20.3% of the unemployed. Year-over-year, the number of long-term unemployed was down by 338,000. The underemployed rate, or the U-6 rate, stands at 8.0%, a drop of 0.2% month-over-month. It is now at pre-recession levels and well below the historical median level of 9.7%; recording began in January 1994. Percent 12.0 1 8.0 6.0 4.0 2.0 8.0 4.1 Source: U.S. Bureau of Labor Statistics/FRED 60 40 All Employees: Total Nonfarm Payrolls The initial total nonfarm payroll employment for March moved up 103,000 and was revised up to 155,000, which followed the significant gain in February of 326,000. Change (000s) 20-20 -40-60 155.0 The primary drivers were manufacturing, health care, and mining. Manufacturing grew by 22,000, with all of the gain in the durable goods component. It also grew 232,000 jobs over the past 12 months with durable accounting for about three-fourths of the jobs added. Health care added 22,000 jobs, in line with the average monthly increase over the past 12 months. Mining increased 9,000 over the month and up 78,000 since its recent low in October 2016. -80-100 Nonfarm employment in January was revised down from 239,000 to 176,000 and February was revised up from 313,000 to 326,000. Source: US. Bureau of Labor Statistics/FRED 9
Employment WIDELY VIEWED AT FULL EMPLOYMENT 68.0 67.0 66.0 65.0 Civilian Labor Force Participation Rate The labor force participation rate, at 62.9%, increased 0.2% since December 2017 but is down 0.1% year-over-year. The employment-population ratio (not shown in graphs), at 60.4%, increased 0.3% since December 2017 and 0.2% over the past 12 months. Percent 64.0 63.0 62.0 61.0 62.9 At the current participation rate and population growth rate, maintaining an unemployment rate of 4.1% suggests the economy needs to add 107.7k jobs on average each month. (Source: Federal Reserve Bank of Atlanta/Jobs Calculator) 6 59.0 Source: US. Bureau of Labor Statistics/FRED The 4-week moving average for initial claims was 228,250 as of the week ending March 31, 3,000 higher than previous week s revised level. The historic low was set on March 10, 2018, when the reading was 222,750. 700 600 500 4-Week Moving Average of Initial Claims The weekly initial claims for the week ending March 31, was 242,000, a decrease of 24,000 from the previous week s revised level. Number 400 300 200 228.3 100 0 Source: U.S. Employment and Training Administration/FRED 10
Consumer 11
Consumer RETAIL SALES IMPROVE AND CONSUMER CONFIDENCE HITS PEAKS Advance estimates of U.S. retail and food services sales, which is adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, for March posted an increase of 0.6% month-over-month, a 4.5% increase year-over-year. Both gasoline stations and nonstore retailers posted the highest year-overyear change at 9.7%. While sporting goods, hobby, book, and music stores had the largest decrease at 3.3% compared to last year. Percent Chg. From Year Ago 15.0 1 5.0-5.0-1 Retail and Food Services Sales 5.1-15.0 Source: US. Bureau of the Census/FRED Consumer Sentiment reached its highest level since 2004 with the Sentiment Index posting a level of 101.4, up from 99.7 the prior month. All of the gain came from households with incomes in the bottom third while those in the middle third were unchanged and those in the top third fell. The drop in the top third was due to greater concerns over government economic policies, especially trade policies. The consensus expectation is that interest rates will increase, while inflation and wage expectations eased in late March. The main factor driving discretionary spending is that consumers remain confident in their future job and income prospects. Confidence was anchored more in stability of these economic prospects rather than the size of the expected gains. The data were consistent with a growth rate of 2.6% in consumption over the next year. Current Economic Conditions set a new all-time peak, jumping to 121.2 in March, up from 113.8 at year-end 2017. However, the appeal of low prices has largely disappeared and has been replaced by favoring buying-in-advance of anticipated price increases. For home purchases, borrowing-in-advance of higher mortgage rates was cited by 18%, up from 7% three months ago, returning to last year s level. Index 1966:Q1=100 14 12 10 8 6 4 2 University of Michigan: Surveys of Consumers 121.2 101.4 88.8 Recession Consumer Sentiment Current Economic Conditions Consumer Expectations Consumers continue to express optimism about future prospects for the overall economy. The Expectations Index rose from 84.3 in December 2017 to 88.8 in March 2018. Source: University of Michigan/FRED 12
Consumer IMPROVING INCOME BUT SAVINGS REMAIN LOW Real disposable personal income was $12,953.8 billion dollars as of March, a 0.2% increase from the prior month and a 1.7% increase year-over-year. Percent Chg. From Year Ago 8 6 4 2 0-2 -4 Real Disposable Personal Income 1.7-6 Source: U.S. Bureau of Economic Analysis/FRED Percent 12.0 1 8.0 6.0 4.0 2.0 Personal Saving Rate 3.0 Personal savings increased $110.8 billion from December 2017 to $460.6 billion in March but decreased $22.5 billion month-over-month. The personal savings rate was 3.0%, an increase of 0.6% from December 2017 but a decrease of 0.3% from the prior month and well below the 30-year average of 5.7%. Source: US. Bureau of Economic Analysis/FRED 13
Housing 14
Housing HOUSING CONTINUES ITS MARCH UPWARD, INVENTORY AND PRICES DAMPEN THE MOOD Building permits, which lead housing starts by 1-3 months and are subject to less volatility, in March were at a seasonally adjusted annual rate of 1,354,000, 2.5% above the revised February rate and 7.5% above the March 2017 level. Singlefamily building permits were at a rate of 840,000, 5.5% below the revised February rate and 3.2% higher year-over-year. Building permits for 5+ units increased significantly over the past months posting a rate of 488,000 in March, 24.3% from the February rate and 16.3% above the March 2017 level. Housing starts in March were at a seasonally adjusted annual rate of 1,319,000, 1.9% below the revised February rate and 10.9% above the March 2017 rate. Single-family housing starts in March were at a rate of 867,000, 3.7% below the revised February rate but 8.4% higher year-over-year. Housing Starts for 5+ units was 439,000, 15.1% higher than the February rate and 23.7% higher than the March 2017 level. New home sales in March 2018 were at a seasonally adjusted rate of 694,000, 4.0% above the revised February rate and 8.8% above the March 2017 rate. The median sales price of new houses sold in March 2018 was $337,200. The average sales price was $369,900. The seasonally adjusted estimate of new houses for sale at the end of March was 301,000, which represents a supply of 5.1 months at the current sales rate. Existing-home sales (not graphed), as reported by the National Association of Realtors, posted a monthly gain in March of 1.1%, or a seasonally adjusted annual rate of 5.60 million; however, lagging inventory levels and affordability constraints contributed to the year-over-year decrease of 1.2%. The median price for existing-home sales was $250,400, up 5.8% from a year ago. March s price increase marks the 73 rd straight month of year-over-year gains. Supply rose 5.7% to 1.67 million but still remains 7.2% lower than a year ago and has fallen year-over-year for 34 consecutive months. Relative to sales, supply is at 3.6 months vs. 3.8 months a year ago. According to Freddie Mac, the average commitment rate for a 30-year, conventional, fixed-rate mortgage increased for the 6 th straight month to 4.44% in March, the highest since 4.46% in December 2013.The average commitment rate for all of 2017 was 3.99% Existing-home sales in the Midwest increased 5.7% in March but are down 1.5% yearover-year. The median price was $192,200, up 5.1% from a year ago. Sales in the West declined 3.1% in March but are up 0.8% year-over-year. The median price was $377,100, up 7.9% year-over-year. Thousands of Units 2,500 2,000 1,500 1,000 500 Housing Permits, Housing Starts, and New Home Sales Recession Housing Permits Housing Starts New Home Sales 1354.0 1319.0 694.0 0 Source: US. Bureau of the Census/FRED 15
Market Indices 16
Market Indices STOCK MARKET REMAINS NEAR ALL-TIME HIGHS, SHORT-TERM YIELDS INCREASING, YIELD CURVE FLATTENING S&P 500 closed March at 2,703, 14.5% higher than 12-months prior. The CBOE Volatility Index, a measure representing the market s expectation of stock market volatility, indicates that the market expects the range of movement, up or down, in the S&P 500 index over the next year to be less than 19.0%. LIBOR (not graphed) also ended March at 2.17%. Short-term rates are on the rise and long-term rates remain relatively low as the yield curve continues to flatten. The 10-year Treasury Note minus 2-year Treasury Note spread fell to 0.56% on March 30 and remains below the 32 year median of 1.08%. With potential rate hikes on the horizon, modest inflation, and geopolitical issues looming, how will the short and long end of the curve react? S&P 500 3,000 2,500 2,000 1,500 1,000 500 0 S&P 500 and CBOE VIX S&P 500 CBOE VIX (Right Axis) 70 60 50 40 30 20 10 0 CBOE VIX Source: S&P Dow Jones Indices LLC/Chicago Board Options Exchange/FRED 3.00 10 Year - 2 Year Treasury Yield Curve Steepness Recession 10Y-2Y TSY Spread 32 Year Spread Median (2Y-10Y) 2.50 2.00 Percent 1.50 1.00 1.08 0.50 0.56 0-0.50 Source: Board of Governors of the Federal Reserve System (US)/FRED 17
Economic Activity 18
Economic Activity MANUFACTURING DATA IMPROVING Industrial production rose 0.5% in March and posted a 4.3% increase yearover-year. Its subcomponents, manufacturing, mining, and utilities, posted month-over-month changes of 0.1%, 1.0%, and 3.0%, respectively. Yearover-year, manufacturing, mining, and utilities increased 3.0%, 10.8%, and 5.3%, respectively. 10 5 Industrial Production Index 4.3 Manufacturing makes up the bulk of the industrial sector and the first quarter has started out volatile with January posting a dismal 0.4% decrease, February posting a strong 1.5% increase, and March posting a subpar reading of 0.1%. In March, an increase in durables of 0.4% and other manufacturing of 0.2% was pulled down by a decrease of 0.3% for nondurables. Nearly all major industry groups within durables posted advances while all major industry groups within nondurables, except for paper, petroleum and coal products, and chemicals, declined. Mining continues to post solid gains and has posted six consecutive quarters of gains but it is still about 4% below its peak in 2014. The utilities index increase in March was due to electric utilities and natural gas utilities up 1.2% and 15.6%, respectively. The year-over-year percent change has found positive territory due to electric utilities and natural gas utilities posting gains of 4.0% and 14.8%, respectively. Percent Chg. From Year Ago 0-5 -10-15 -20 Source: Board of Governors of the Federal Reserve System (US)/FRED Percent of Capacity 90 80 70 60 50 40 30 20 10 Capacity Utilization: Total Industry 78.0 Capacity utilization was 78.0% in March, a rate that is 1.8% below its long run average. The manufacturing component was at 75.9% in march, a rate that is 2.4% below its long-run average and illustrates how excess capacities have the ability to hold down goods inflation. Utilization for mining was at 90.1% in March, 3.1% above its long-run average but 1.5% below its high in 2014. 0 The operating rate for utilities was at 79.0%, well below its long-run average of 85.3%. Source: Board of Governors of the Federal Reserve System (US)/FRED 19
Money Supply and Velocity 20
Money Supply & Velocity VELOCITY OF MONEY SEES THE SLIGHT IMPROVEMENT BUT REMAINS NEAR ALL-TIME LOWS The velocity of M2, which includes M1 and savings deposits, CDs, and money market deposits, is the most common measurement referenced for the velocity of money and provides some insight into how quickly the economy is spending versus saving when compared to the velocity of M1. The velocity of M2 remains at an all-time low of 1.44, indicating that money isn t changing hands and consumers continue to save. The velocity of M1, which is the money supply of currency in circulation and represents everyday short-term consumption transactions, is 5.48 versus the peak reading of 10.68 in the 4 th quarter 2007. The latest reading is the lowest reading since 1 st quarter 1974. The velocity of MZM, which is the broadest money supply and helps determine how often financial assets are changing hands, is 1.31 and is the lowest reading in the history of this measurement which started in January 1959. 12.0 Velocity of Money Stock Recession Velocity of M1 (LH axis) Velocity of M2 (RH axis) Velocity of MZM (RH axis) 2.5 1 2.0 Ratio 8.0 6.0 4.0 1.5 1.0 2.0 0.5 Source: Federal Reserve Bank of St. Louis/FRED 21
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