More evidence that the US economy is not the basket case we thought it was three months ago, raising the odds that the central bank will make its second rate rise in eight years sooner than the market expects.
The March jobs data, out this Friday night, will be a crucial factor of course, but another substantial upgrade in December 2015 quarter GDP growth last Friday has raised the stakes for the first rate rise in 2016.
That’s despite more signs of weakening levels of activity in retailing, the housing sector and some, but not all, parts of manufacturing. The great slide in oil and gas activity is having a negative impact, especially in the midwest, while the big cuts in spending and investment are also hitting the wider economy.
But the jobs market is strong, as February showed, along with the extra jobs for January and December, and while wage growth slowed a touch in February, it wasn’t much and they still rose by more than 2% annual.
Around 200,000 new jobs are expected for March – February produced a higher than expected 242,000 new jobs and over 70,000 extra jobs for the two preceding months.
Before the Friday night report, our time, markets will be watching Federal Reserve Chair Janet Yellen who is due to speak in New York early tomorrow morning, for guidance on the timing of any interest rate hikes.
Earlier this month the Fed signalled it would raise rates just twice this year amid lower growth and inflation forecasts, and markets have now been looking for a rise in September.
US inflation remains weak – despite a rise in core consumer price inflation. But the Fed’s preferred measure (out overnight) is still short of its 2% target.
And while oil prices have bounced strongly in the past two months, US petrol prices are still low – and the Fed wouldn’t mind a rise in inflation and expectations to levels it is more comfortable with.
But the third and final estimate December growth was a surprise for analysts and the market generally – annual growth was raised to 1.4% from 1% in the second estimate and the weak first figure of just 0.7%.
Positive US GDP raises rate hike expectations
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The GDP report helped push the value of the Aussie dollar down more than a cent over the weekend to around 75.30 as investors bought greenbacks in the belief the chances of a rate rise are now greater than they have been for 2016 so far.
The dollar fell further in light Asian trading yesterday to 75 US cents (Australia and Hong Kong were closed).
Driving the improvement in US GDP was relatively strong consumer spending. The latest report and other data exposes the weakness of the fears of a recession that drove the sell-off in US markets earlier in the year (helped by the slide in oil prices and fears about China and other emerging markets).
The US economy grew at a 2% annual rate in the third quarter and 2.4% for all of 2015 (weaker than Australia’s 3%).
Consumer spending, which accounts for more than two thirds of US economic activity, rose at a 2.4% pace in the third estimate, not the 2% rate reported last month. Higher consumption of services (the hardest part of the economy to measure) than previously estimated accounted for the revision. Trade improved slightly.
Fourth-quarter inventory investment was revised lower, which is usually a negative as it detracts from growth (a rise in inventories boosts growth). As a result, inventories subtracted 0.22 of a percentage point from GDP growth instead of the previously reported 0.14 of a percentage point.
There was some bad news in the GDP report, with corporate profits falling for a second straight quarter thanks to the impact of the strong dollar (which has fallen a little this quarter) and cheap oil undercut the earnings of multinational and energy companies.
Profits after tax (and with inventory valuation and capital consumption adjustments) fell at an annual rate of 8.4%, the biggest decline since the first quarter of 2014, after falling at a 1.7% pace in the third quarter. More importantly, the slide in the final two quarters saw profits for 2015 as a whole slump 5.1%, the biggest annual fall since 2008 when the GFC was erupting over markets and the US economy.
For all of 2015 profits dropped 5.1%, the largest decline since 2008, after slipping 0.6% in 2014. The 10.5% rise in the value of the dollar and the 50% slide in oil and gas prices did most of the damage.
Looking to the current quarter, which ends on Thursday, US economists are looking for growth of 1.5% in the first estimate on April 28, two days after the Fed’s meeting.
That would be lineball with the final estimate for the 4th quarter, which is a lot better than fears in January and February of no growth at all.
The high level of inventories (with retail sales down 1.7% (annual) for the three months to February) and weak durable goods orders, mean the chances of weak growth could be a bigger possibility than currently estimated. But that’s what they were saying about the first quarter and it turned out to be much stronger than anyone had thought.
