Forex Profits Master: Lower Inventory Growth Offsets Gains in Consumption

Highlights

Lower Inventory Growth Offsets Gains in Consumption as GDP is revised downward
– The preliminary estimate for 1Q13 real GDP growth was revised down slightly as continuing headwinds put downward pressure on the recovering private sector. Slowing from 2.5% to 2.4% QoQ SAAR, the quarter’s revisions showed a similar situation to what was expected when the first estimate was released. Inventories bore the brunt of the slowdown in this second revision having posted a large gain in the first estimate. Gross private domestic investment decelerated 3.3pp to 9%, led by non-residential structures which rose less than previously estimated. Government consumption and investment continues to exert added weight on GDP growth as total government spending was revised downward 0.8pp. Exports were revised downward but net exports actually shifted upward slightly given the larger than expect drop in import growth

- As per usual it was personal consumption which managed to remain fervently positive despite the headwinds posed by the government’s self-inflicted spending curtailment and lower private investment. Personal consumption was revised upward as the consumer continues to be the driving force in the economy. Up 0.2pp to 3.4% QoQ SAAR, the increase from the first estimate was primarily in nondurable goods which rose by a full 1.2pp to 2.2%, a significant increase and an positive signal that, despite the sequester and sluggish global growth, the U.S. consumer remains resilient and hungry for economic growth.

Personal income and spending lose steam as consumer activity wanes slightly

- Personal income in April showed no signs of an increase as the figure was unchanged on a MoM basis after a 0.3% rise the month prior. The wages and salaries component was also unchanged while supplements to wages and salaries rose by 0.1% due to a slight rise in employer contributions to pension and insurance funds. Additionally, income from receipts on assets rose 0.7% which is quite muted but much better than the decline in March. This is in line with our expectations for subdued wage growth in the coming quarters.

- Personal spending was more disappointing, down 0.2% as consumers took their foot off of the gas for the month, evidenced as well by weaker retail sales. The bulk of the decline was focused on goods and in particular non-durable goods which declined 1.2% in April. While consumer spending has been a significant driver in economic growth over the past quarters, there is some concern that a slowdown is imminent given the weaker pace of consumer activity over the past two months. Nevertheless, with lower energy prices and summer months ahead, we do not expect this decline to persist into the 2H13. Turning to inflation, the situation still favors the Fed’s quantitative easing policy but with a YoY headline rate of 0.7% the notion of deflationary pressures will probably become a topic of conversation for the coming meetings.

Week Ahead

ISM Manufacturing Index (May, Monday 10:00 ET)

Forecast: 50.2 Consensus: 50.5 Previous: 50.7

The ISM Manufacturing index for May is expected to rest near the 50 mark again as few signs point toward a recovery in the sector. Similar to last year’s trend, the industry began the year on a strong heading but lost steam into the second quarter. This has been evidenced already as the index fell in April to 50.7, 3.5 points below 2013’s high reached in February. Recent Federal Reserve surveys do little to impart much optimism in the industry as most show a neutral or declining trajectory. The Texas manufacturing survey’s general business activity index recovered slightly but remains in negative territory in May at -2.2. The New York Fed’s survey also showed declines in both new orders and shipments. Another heavily followed index, the Philly Fed survey, plunged in May, falling to -5.2 as new orders and shipments put strong downward pressure on the current outlook for businesses. Overall, the situation is much in line with the 2Q13 swoon that pundits pointed to as a headwind for the sectors growth 2013. However, given the resilience of certain aspects within the manufacturing survey such as energy and construction, the ISM manufacturing index is unlikely to fall below the 50 mark in May.

International Trade (April, Tuesday 10:00 ET)

Forecast: $-40.5B Consensus: $-41.0B Previous: $-38.8B

The international trade balance is expected to worsen for the first time in three months as global demand shows some signs of weakening and currency depreciation may result in an increase in imports. Energy remains a key factor for the U.S. in terms of influencing the trade balance on a month-to-month basis. According to the March report, exports of oil and gas were up 51.7% YoY with double digit gains throughout the past two quarters. We continue to expect this trend to rise as the U.S. turns to cheaper natural gas as an alternative to imported commodities. While exports of energy are helping to boost demand for U.S. commodities, the overall the appetite for U.S. goods has been decelerating over the past quarter and is not expected to increase in 2Q13 unless the global economy mounts a recovery in the short term. In terms of imports, we have seen a similar deceleration or stabilization of domestic demand over the past few months as the U.S. turns inward for large ticket items like vehicles and larger capital. Also, given the depreciation of the Yen since the implementation of Japanese quantitative easing, there is upside potential for U.S. imports from Japan to increase, at least temporarily as it is one of our largest trading partners. Overall however, we do not expect the trade balance to deteriorate any further than its level at the beginning of the year and we remain optimistic with regard to a 2H13 rise in global demand for U.S. goods.

Nonfarm Payrolls & Unemployment Rate (May, Friday 8:30 ET)

Forecast: 176K, 7.5% Consensus: 168K, 7.5% Previous: 176K, 7.5%

Continuing to recover from its slight deceleration in March, we expect nonfarm payrolls to rise as overall economic conditions continue to improve, albeit at a leisurely rate. Initial jobless and continued claims have fallen at a quicker pace since April, hinting at better employment conditions throughout the economy in May. However, given the weakening manufacturing sector and feeble retail sales growth, there is little evidence to support payroll growth surpassing April’s 165K by an exorbitant amount. Despite some of the difficulties plaguing the construction market, we continue to expect the industry to grow in terms of employment as spring housing activity blooms and easing credit standards promote housing starts. In general, we expect that payroll growth will remain comparatively weaker than the 200K mark per month, recovering in 2H13 as our forecasts point toward a pickup in manufacturing and consumer activity.

Consumer Credit (April, Friday 8:30 ET)

Forecast: $13.8B Consensus: $13.4B Previous: $7.9B

The decline in revolving credit continues its downward movement from last month, reflective of a more cautious the consumer as soft employment data and retail sales do not bode well for consumption trends. As for non-revolving credit, the weaker pace in March may be indicative of slower auto demand but student loans will continue to dominate the expansion of total outstanding consumer credit. Given recent data on consumer spending from March however, there is potential downside for April in terms of credit growth as the consumer seems to be less confident in spending outside of their means. With auto sales slowing somewhat in April, it is likely that overall credit figure will be driven by student loans with significant drag from revolving credit.

Market Impact

Next week holds a few broad indicators that are likely to continue to show the overall slowdown in the manufacturing sector and weaker global demand in terms of trade. However, the expected rise in nonfarm payrolls should impart some optimism to the consumer and with confidence on the rise according to various surveys, the situation should improve after a disappointing read on April consumer spending.