Monday Update: Service Sector Confidence Rises, Trade Deficit Down

Posted by Brad McMillan, CFA, CAIA, MAI

This entry was posted on Jun 11, 2018 2:01:49 PM

and tagged In the News

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Monday updateThere were only two major economic news releases last week, but the week ahead will be a busy one.

Last week’s news

On Tuesday, the Institute for Supply Management (ISM) Nonmanufacturing index beat expectations. It rose from 56.8 in April to 58.6 for May, above the expected 57.6. This is a diffusion index, where values above 50 indicate expansion. As such, the rise means that an already robust service sector is getting even stronger. After a slow start to the year, services now appear to be accelerating, and healthy retail sales growth and regional surveys suggest that acceleration continues. This will likely mean that overall economic growth in the second quarter should be higher than that of the first quarter.

On Wednesday, the international trade report also did better than expected. The trade deficit in March was revised down from $49 billion to $47.2 billion, and it improved further to $46.2 billion in April. This improvement was not entirely unexpected, however, as the advance goods trade report showed that deficit had narrowed a bit. With the improvements, trade may provide a small boost for the economy as a whole in the second quarter, although the pending tariff-related trade conflicts could put that at risk.

Overall, last week’s news was good. The positive surprises continue to indicate that after a weak first quarter, growth is accelerating.

What to look forward to

On Tuesday, the consumer price indices will be released. The headline index, which includes energy and food, is expected to rise by 0.2 percent for May, the same as in April. Core prices, which exclude food and energy, are also expected to rise by 0.2 percent for May, up from a 0.1-percent increase in April. Annual rates for the headline index should increase from 2.5 percent to 2.7 percent in May, up from 2.5 percent in April on base effects. The core index is expected to increase by less, up 2.2 percent for May from 2.1 percent in April. These figures are above the Fed's target range for inflation, so they will support a rate increase if they come in as anticipated.

The producer price indices will be released on Wednesday. Headline inflation is expected to increase from 0.1 percent in April to 0.3 percent in May, while the core figure should hold steady at 0.2 percent. On an annual basis, the headline index is expected to increase from 2.6 percent in April to 2.9 percent in May, while core price growth is expected to hold steady at 2.3 percent. Cost pressures on business are expected to remain strong, which will also support Fed action. The question, then, is when those pressures will feed through to consumers.

On Thursday, the retail sales report is expected to show growth, with the headline number rising from a 0.2-percent increase in April to a 0.4-percent increase in May. Core sales, which exclude autos, are also expected to rise from 0.3 percent to 0.4 percent. These numbers reflect a strong level of spending growth. The continued rebound in consumer spending is likely to help support overall faster second-quarter growth, which will likely be well above that of the first quarter.

On Friday, the industrial production report is expected to show that growth has slowed, from 0.7 percent in April to 0.3 percent in May, while manufacturing growth is expected to decline from 0.5 percent to 0.3 percent. Industrial production has benefited from the continued rise in oil drilling, and longer-term manufacturing growth still remains solid.

Have a great week!

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