It’s cold and wet in Wellington, so instead of going out for a walk at lunchtime I find myself updating spreadsheets and thinking a bit more than usual about upcoming data releases. With that in mind, please note this is a post for data geeks.
US activity data is pointing to a soft-ish March quarter GDP result. The Atlanta Fed’s GDPNow forecast is tracking Q1 GDP at a quarterly annualised rate of 2.0% (as at April 10th). That looks soft in light of some predictions of 3% GDP growth for calendar year 2018.
But over the last few years GDP growth in the first three months of the year has suffered from what has become known as ‘residual seasonality’. The March quarter has typically printed to the low-side, only for growth to accelerate and catch up with expectations for annual growth over the second and third quarters.
In fact, over the last five calendar years (2013 to 2017) annual US GDP growth has averaged 2.2% while the March quarter of each of those years has averaged an annualised 1.4%. In that respect, 2.0% for this March, should that prove right, could be an indicator of a better than average year ahead.
Of course that constructive outlook is supported by the upcoming positive fiscal impulse from tax cuts and higher government spending. That will help support the underlying trend of already solid business investment and consumer spending and should see quarterly annualised growth rates of around 3% from the June quarter.
Furthermore, labour income growth is still tracking strongly on the back of solid jobs growth and a modest acceleration in wage growth. Payrolls growth looked soft in March but if followed a stellar February. Three-month rolling average payrolls gains are still tracking at around 200k per month. Wages seem to have settled at a modestly higher level with average hourly earnings at 2.7% in the year to March.
Also keep at eye on upcoming CPI data – the next release of which is tonight. It was this time last year that US inflation went through a soft patch, led by the drop in wireless service charges in March last year, that saw monthly core inflation come in at -0.07%.
In fact rolling three–month annualised core CPI inflation was not much above zero in the three months to May 2017. Those soft numbers are about to fall out of the annual calculation. March month data tonight is expected to show a 0.2% month-on-month gain and for the annual rate to jump from 1.8% to 2.1%. It seems likely the annual rate will move a bit higher again over the next couple of months. Assuming monthly gains of around 0.15 - 0.2% in April and May, we should see the annual rate of core inflation back up to around 2.3%.
While we will be poring over the monthly data to look for anything interesting, the jump in the annual rate will be mostly due to base-effects and not necessarily a sign of sharply rising inflationary pressures.
The upshot of this is the Federal Open Market Committee (FOMC) is unlikely to be spooked by what will appear at first blush to be a soft GDP print in a couple of weeks. But neither will they be spooked by rapid increase in core inflation to back over 2% over the next month or two. That will simply provide reassurance that US monetary policy is on the right track.
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