Data Preview: After Partial Recovery in May; Focus Turns to June

After solid improvement in the May US data released over the last two weeks, the focus in the coming week turns to the early-June regional conditions data.

June readings from the New York Fed and Philadelphia Fed released this previous week indicated continued improvement, with the Philadelphia Fed’s reading indicating positive growth in the region for the first time since February. In the upcoming week, manufacturing readings from the Richmond Fed and Kansas City Fed are expected to continue that trend. Both improved in May, but neither indicated actual expansion.

Services readings from the Richmond, Philadelphia, and Kansas City Fed banks are also expected to show further improvement. The Flash Markit estimates for June will be released on Tuesday, providing the first look at national conditions for both manufacturing and non-manufacturing.

Homes Sales Should Improve on Low Rates, But Concerns Remain

Record low mortgage rates and rising new weekly mortgage applications reported by the Mortgage Bankers Association have suggested that home sales should move higher in the May data. The sharp rebound in retail sales in the month, lifted by a modest improvement in the jobs picture, suggests that consumers are beginning to reintegrate into the larger economy as stay-at-home orders were lifted. The same should hold true for home buying.

Pent-up demand from two months of shutdowns led buyers to do some house hunting in May and to take advantage of the extremely low rates. However, home building has been soft over the last few months, including the May data released on June 16, which should keep upward pressure on prices and partially offset the benefit of those lower rates.

The existing home sales data have been a bit softer than new home sales, particularly in May, as current homeowners are less likely to leave their current homes during continued uncertainty. Applications for mortgage refinancing have also rebounded after a dip, a sign that homeowners are drawing out equity to make ends meet and to upgrade their current dwellings.

Personal Income and Consumption Both Sharply Higher in May

Nonfarm payrolls rebounded by 2.5 million jobs in May and the average workweek surged by 0.5 hours, more than offsetting a partial decline in average hourly earnings after an April surge. As a result, wages and salaries should rebound after sharp declines in March and April and give a boost to personal income. Likewise, further jobless claims filings, while not growing as quickly as they did in April, should push government transfer payments up further and a rebound in stock prices should lift return on assets.

On the spending side, the 17.7% jump in retail sales recorded in May as states reopened will give a large boost to both goods and services PCE in the month. The savings rate had surged to 33.0% in April, as consumers received stimulus payments but did not spend them immediately. The spending rebound in May was likely fueled by some of that run-up in savings and should trim the savings rate.

Consumer prices declined further in the month, according to the Bureau of Labor Statistics’ CPI measure, suggesting both overall and core PCE prices were also soft. One upside risk is a sharp increase in prices at the wholesale level which may have filtered into the PCE prices measure later in the month.

As a result of the solid gain in nominal PCE and the modest inflation gain, real PCE should rise sharply in May. However, the large drop in March and continued decline in April will leave second quarter consumption well below its first quarter level and contribute to the widely expected plunge in second quarter GDP.

The third estimate of first quarter GDP will be released on Thursday, but no major changes are expected to the 5.0% drop already reported.

Jobless Claims Growth Slower, but Continues to Pile Up

The weekly growth pace of initial jobless claims has slowed in each of the last 11 weeks after the initial runup in mid-March, which some have suggested is a positive sign that the worst is over, however, the still-elevated 1.5 million level of initial claims last week suggests that backlogs are continuing to be worked down, or worse that there are new filings.

The Paycheck Protection Program, which allowed some small businesses to keep their workers on staff for a period, was cited as a key reason for the surprise 2.5 million payrolls gain in May. When that money runs out, initial jobless claims are likely to rebound.

Likewise, the level of continuing claims remains extremely high despite that large improvement in hiring in May. It is possible that some workers have chosen to remain out of the labor force in order to collect the enhanced unemployment payments, but the more likely explanation is that the May payrolls gain reflects rehiring of former workers due to PPP, while the high continuing claims level reflects workers whose jobs remain lost.

Durable Goods, Advance Trade Data Still Soft

As with the other data for May, orders and shipments of durable goods may have seen a partial rebound after sharp declines in March and April. Unlike retail sales, however, there was less pent-up demand for manufacturing goods when factories reopened. Unfilled orders declined in both March and April, leaving less slack to pick up.

The advance trade report, released at the same time on Thursday, is likely to offer a similar message. With factory activity only beginning to ramp up in April, wholesale inventories were likely slim in May, while at the same time brisk consumer spending likely drained retail inventories.

The international trade gap should narrow in May after a sharply wider deficit in April, with both imports and exports up on renewed demand.

June Consumer Sentiment to Remain Above the May Reading

The University of Michigan Sentiment reading is expected to be virtually unrevised in the final estimate for June, keeping it near the preliminary estimate of 78.9, up from 72.3 in May.

One upside risk is the extraordinarily strong retail sales rebound reported later in the month and the continued reopening of consumer activities as the month progressed. As a result, the current conditions reading could see an upward revision.

At the same time though, Michigan said in its preliminary report for the month that consumers are still genuinely concerned about conditions for the rest of the year. None of the data released since the early estimate should alleviate that concern and the 6-month outlook should remain near its preliminary level.

Colin Lambert

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