Consumer spending, personal income, PCE prices

The Commerce Department said consumer spending increased 0.2 percent after being flat in April. Spending, which accounts for more than two-thirds of U.S. economic activity, had been forecast rising 0.4 percent after a previously reported 0.1 percent dip in April.

When adjusted for inflation, consumer spending fell for a second straight month, suggesting spending this quarter could struggle to regain momentum after growing at its slowest pace in nearly five years in the first quarter.

Spending in May was probably constrained by weak healthcare spending as outlays on services barely rose for a second month.

While reports ranging from employment to manufacturing and the services industries suggest the economy has rebounded after sinking in the January-March period, the consumer spending data indicated that growth would probably fall short of the 4.0 percent annual pace that some economists are expecting in the second quarter.

Personal Income and Outlays

From Calculated Risk

Real PCE — PCE adjusted to remove price changes — decreased 0.1 percent in May, compared with a decrease of 0.2 percent in April. … The price index for PCE increased 0.2 percent in May, the same increase as in April. The PCE price index, excluding food and energy, increased 0.2 percent in May, the same increase as in April. … The May price index for PCE increased 1.8 percent from May a year ago. The May PCE price index, excluding food and energy, increased 1.5 percent from May a year ago.

Note: Usually the two-month and mid-month methods can be used to estimate PCE growth for the quarter (using the first two months and mid-month of the quarter). However this isn’t very effective if there was an “event”, and in Q1 PCE was especially weak in January and February – and then surged in March.

Still, using the two-month method to estimate Q2 PCE growth, PCE was increasing at a 2.3% annual rate in Q2 2014 (using the mid-month method, PCE was increasing less than 1.5%). Since the comparison to March will be difficult, it appears PCE growth will be below 2% in Q2 (another weak quarter).

Note the now familiar down into winter, up some, and then settling down again pattern:

charts and comments GDP, durables, mtg apps, etc.

>   
>   On Wed, Jun 25, 2014 at 8:52 AM, Sheraz wrote:
>   
>   Very weak US numbers
>   

And not one ‘nice call’ email!!!

And yesterday’s stock market action suggests a possible data leak???
:(

US 1Q GDP has been revised lower by far than expected. After having initially been reported as a 0.1% rise, then a 1% contraction, the third release shows that GDP growth is now reported as -2.9 QoQ% annualised, which leaves annual growth at just 1.5%YoY.



The consensus expectation was for a -1.8% reading. The damage was largely done through the private consumption component, which is now reported as rising just 1% versus 3.1% previously.

Also ‘smoothing’ from numbers that looked high to me in H2 and an adjustment to ACA related healthcare expenses previously booked as PCE:


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Gross private investment remained an 11.7% contraction

Maybe after a Q4 surge due to expiring tax credits?


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while government consumption was left at -0.8%. However, exports were revised down and imports revised up meaning that the contribution from net trade is to subtract 1.5% from GDP growth rather than 0.95% as previously announced.

Reversing a similar, prior blip up, as previously discussed:


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Nonetheless, reaction should be fairly muted given widespread expectations of a sharp bounceback in 2Q14 and the fact that the weather had such a damaging impact on 1Q activity. Indeed, we suspect that we could see GDP rise by more than 5% annualised in 2Q.

And if so, H1 would be +1% :(

High frequency numbers for the quarter have looked good while inventories should also make a significantly positive contribution after having been run down sharply.

After having been run up in H2. We’ll see where they go from here.

And, as previously discussed after the jump up in Q3, inventory accumulation seldom leads a boom:


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Mortgage purchase apps still dismal:

According to the MBA, the unadjusted purchase index is down about 18% from a year ago.


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And May durables not so good either:

Highlights
Durables orders were much weaker than expected for May. Durables orders fell 1.0 percent in May after rising 0.8 percent in April. Analysts forecast 0.4 percent. Excluding transportation, orders slipped 0.1 percent, following a 0.4 percent gain in April. Market expectations were for 0.3 percent.

Transportation fell 3.0 percent after a 1.7 percent rise in April. The latest dip was from weakness in nondefense aircraft. Motor vehicles and defense aircraft orders rose.

Outside of transportation, gains were seen in primary metals, fabricated metals, and “other.” Declines were posted for machinery, computers & electronics, and electrical equipment.

On a positive note, there was improvement in equipment investment. Nondefense capital goods orders excluding aircraft rebounded 0.7 percent in May after decreasing 1.1 percent the month before. Shipments of this series rebounded 0.4 percent after a 0.4 percent dip in April.

The good news is this series is muddling along ok:


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The latest durables report is in contrast to recently positive regional manufacturing surveys and also the sharp jump in manufacturing production worker hours of 0.8 percent for May. But durables data are very volatile and we likely need a couple of more months of data before taking a negative tone on this sector.

The next leg to fall may be employment, as the 1.2 million people who lost long term benefits at year end may have been taking menial jobs at the rate of maybe 75,000/month or more for 6 months or so, which may have front loaded the monthly jobs numbers. If so, monthly job gains may fall into the 100,000 range soon.

So in general it was down for the winter, back up some, and we’ll see what happens next.

The ‘survey’ numbers and professional forecasts look promising, however it still looks to me like we are under the macro constraint of a too low govt deficit that’s struggling to keep up with the unspent income/demand leakages, with scant evidence of help from growth in private credit expansion.

And I tend to agree with Fed Chair Yellen here, which would tend to keep rates lower/longer if she gets her way. However I don’t agree that low rates somehow support aggregate demand, so I don’t see the likelihood of any call from the Fed or other forecasters for the fiscal relaxation I’ve been proposing.

Yellen may be poised to rewrite Fed’s rule book on wages, inflation

June 25 (Reuters) — “My own expectation is that, as the labor market begins to tighten, we will see wage growth pick up some to the point where … nominal wages are rising more rapidly than inflation, so households are getting a real increase in their take home pay,” Federal Reserve Chair Janet Yellen said last week, adding: “If we were to fail to see that, frankly, I would worry about downside risk to consumer spending.” Over the last year Fed staff changed their main model for forecasting wage and price inflation to reflect evidence that companies were adjusting prices more slowly than in prior years.

My immediate proposals remain 1) A full FICA suspension, which raises take home pay by 7.6%, and, for businesses that are competitive, lowers prices as well, restoring sales/output/employment in short order 2) A $10/hr federally funded transition job for anyone willing and able to work to promote the transition from unemployment to private sector employment 3) A permanent 0 rate policy with Tsy issuance limited to 3 mo bills. 4) Unrestricted campaign contributions, however, say, 40% of any contribution goes to the opposition…

housing starts and other charts

Same pattern- down some for the winter, up some, then backing off some.

If this is in fact what’s happening, Q2 GDP could be up less than 3%, and 2014 sub 2%, or even sub 0, if the demand leakages are allowed to keep the upper hand and a fiscal adjustment isn’t made.

“The Business Roundtable survey showed chief executives forecast GDP growth of 2.3 percent in 2014, down from last quarter’s estimate of 2.4 percent for the year.”

“Federal Reserve Chair Janet Yellen said last month there was a risk a protracted housing slowdown could undermine the economy.”

Housing Starts

Highlights
Housing took a step back in May. Starts fell a monthly 6.5 percent but followed a strong 12.7 percent spike in April. The 1.001 million unit pace was up 9.4 percent on a year-ago basis and fell short of expected 1.036 million units.

Single-family starts dropped 5.9 percent after a 4.6 percent rise. Multifamily starts declined 7.6 percent, following a 29.2 percent spike in April.

Building permits followed a similar pattern, suggesting some moderation in construction. Permits fell 6.4 percent after a 5.9 percent rise in April. Permits posted at 0.991 million units and were down 1.9 percent on a year-ago basis. Analysts forecast 1.062 million units.

Builder was up some, but has remained below 50 for 5 months, and by historical standards remains dismal:


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Industrial production/manufacturing was up some yesterday, but it’s a relatively small part of the economy and seems to chug along at 3-4% annual growth rates.

“The core CPI was lifted by a 0.3 percent rise in rent. There were also increases in medical care costs, apparel, new cars prices and airline fares.”

This doesn’t read to me like an ‘excessive demand problem’ that higher rates would reverse. But that’s just me. I agree the Fed may think otherwise!

downward revisions for Q1

FYI
who would have thought?
;)

U.S. Economy’s First-Quarter Contraction Could Be Even Worse Than You Thought

By Ben Leubsdorf

June 11 (WSJ) — The U.S. economy may have contracted more than previously thought during the first three months of 2014, private economists said Wednesday based on new health care-sector data from the government.

One analyst said economic output may have contracted at a 2% pace in the first quarter. That would be its worst performance since the recession.

The Commerce Department’s latest estimate of gross domestic product, the broadest measure of output across the economy, said GDP shrank at a seasonally adjusted annual rate of 1% in the first quarter. A revised estimate will be released June 25, and it could show an even larger contraction.

That’s based on the Commerce Department’s Quarterly Estimates for Selected Service Industries report for the first quarter, released Wednesday. It showed that revenue in the U.S. health-care and social-assistance sector fell 2% in the first quarter from the fourth quarter of 2013, not adjusted for seasonal variations or price changes. Hospital revenue fell a seasonally adjusted 1.3% from the prior quarter.

The Commerce Department’s last GDP report, though, said inflation-adjusted spending on health-care services surged to a seasonally adjusted annual level of $1.848 trillion in the first quarter from $1.808 trillion in the fourth quarter of 2013. That estimate for spending on health care boosted overall GDP growth by 1.01 percentage point, keeping the 1% contraction from being even worse.

J.P. Morgan Chase economist Daniel Silver and Pierpont Securities economist Stephen Stanley both cautioned that it’s not clear exactly how the Commerce Department will adjust GDP to account for the new data.

But they both downgraded their estimates for the first quarter based on the new survey, as well as other recently released data. Mr. Silver predicted GDP declined at a 1.6% pace in the first three months of the year, and Mr. Stanley predicted contraction at a 2% pace.

“Ouch,” Mr. Stanley said in a note to clients.

Today’s charts

Couple of lesser indicators showing a familiar pattern- lower growth for the winter then higher growth then growth slowing some.

Goldman ICSC chain store sales index:


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Redbook retail sales, monthly, yoy:


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And looks like a spike up in wholesale sales causes recessions?
;)


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Small biz optimism now back up to prior recession lows!!!
Time to tighten up quick before the hyper inflation takes hold!!!
;)


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World Needs Record Saudi Oil Supply as OPEC Convenes

It wasn’t supposed to happen this way. All the talk last year was about new supply driving down prices. And every US ‘inflation’ of consequence I’ve seen has been oil related.

World Needs Record Saudi Oil Supply as OPEC Convenes

By Grant Smith

June 9 (Bloomberg) — OPEC ministers say they will almost certainly leave their oil-production ceiling unchanged when the group meets this week. What really matters for markets is whether Saudi Arabia will respond to global supply shortfalls by pumping a record amount of crude.

Just six months ago, energy analysts predicted output from the Organization of Petroleum Exporting Countries would climb too high and Saudi Arabia needed to cut to make room for other suppliers. They changed their minds after production from Libya, Iran and Iraq failed to rebound as anticipated, and industrialized nations’ stockpiles fell to the lowest for the time of year since 2008. Saudi Arabia may need to pump a record 11 million barrels a day by December to cover the other member nations, says Energy Aspects Ltd., a consultant.

“Now it’s not whether the Saudis will make room, but whether they’ll keep it going and maintain enough spare capacity,” said Jamie Webster, a Washington-based analyst at IHS Inc., an industry researcher. “OPEC is increasingly having a hard time just doing its job of bringing all the barrels needed.”

Even as the North American shale revolution propels U.S. production to a three-decade peak, supply in other parts of the world is faltering. A battle for political control in Libya, pipeline attacks in Iraq and prolonged sanctions against Iran are preventing those nations from reviving output. While U.S. crude inventories rose to a record in April, restrictions on exports are keeping those supplies in the country, tempering forecasts that global oil prices will decline this year.

Supply Risks

Deutsche Bank AG, Morgan Stanley, Barclays Plc and Citigroup Inc. raised their 2014 Brent price forecasts over the past three months, citing supply risks. The median estimate of the four banks climbed to $107.75 a barrel, from $100.25 as of Dec. 31. The grade has averaged $108.24 a barrel this year.

OPEC, which produces about 40 percent of the world’s oil, will meet in Vienna on June 11 to discuss its 30 million barrel daily production target. Ministers from Saudi Arabia, Angola and Kuwait said they expect no change, as did 22 of 23 analysts and traders surveyed by Bloomberg News.

OPEC’s Economic Commission Board, a panel that reviews supply and demand levels before the meeting, concluded on June 5 that the current production level is adequate, according to two OPEC delegates.

Low Inventories

The International Energy Agency, the Paris-based adviser to 29 nations, recommended on May 15 a “significant rise in OPEC production” to meet demand of 30.7 million barrels a day in the second half of the year. Oil inventories in advanced nations were at 2.62 billion barrels in April, the lowest for that month since 2008, the year Brent reached a record $147.50 a barrel, IEA data show.

Boosting output that high would be “a Herculean task for the group to surmount given that production has been below 30 million barrels a day for the last five months,” London-based Energy Aspects said in a May 27 research note.

The situation has reversed since OPEC last met in December. At that time, the IEA indicated the group would need to reduce output by about 3 percent in the first half of 2014 to make way for North America’s booming shale oil supplies.

U.S. oil production rose to 8.47 million barrels a day in the week ended May 23, the highest since 1986, according to the Energy Information Administration. The nation’s crude inventories were at 399.4 million barrels through April 25, the highest in data beginning in 1982, the EIA estimates.

December Meeting

Several OPEC nations have failed to boost output as their ministers suggested at the group’s last meeting in December. Iraq was aiming for a surge of about 30 percent in 2014 to 4 million barrels a day, Oil Minister Abdul Kareem al-Luaibi said. Libya intended to restore within 10 days full daily capacity of almost 1.6 million barrels, from less than 20 percent previously, Oil Minister Abdulbari al-Arusi said. Iran had secured six months of relief from sanctions imposed by western governments and was seeking its highest output in five years, Oil Minister Bijan Namdar Zanganeh said.

Iraq’s daily production contracted 8 percent since reaching a 35-year peak of 3.6 million barrels in February amid political disputes and pipeline bombings, according to the IEA. In Libya, output has fallen to a 10th of capacity because of protests at oilfields and strikes at export terminals. Iranian supply is little changed, while an end to sanctions relief looms in July if it cannot reach a broader deal on its nuclear program.

Expectations Fade

As a result, inventories of crude and refined oil in Europe were 86 million barrels below their five-year average at the end of March, according to the IEA. U.S. benchmark West Texas Intermediate is about $6 a barrel cheaper than North Sea Brent.

“At the start of this year, expectations around the return of Libyan, and subsequently Iranian, barrels were high,” Amrita Sen, chief oil market strategist at Energy Aspects, said by e-mail on May 20. “Today those possibilities have diminished substantially. The real question concerns how OPEC will meet higher demand for its crude in the third quarter. The onus falls on Saudi Arabia to do much of the heavy lifting.”

Saudi Oil Minister Ali Al-Naimi told reporters in Seoul on May 12 that any supply shortage in the oil market can be covered. The kingdom is capable of producing as much as 12.5 million barrels a day of crude oil and pumped 9.67 million in May, according to data compiled by Bloomberg. Media officials at Saudi Arabia’s oil ministry in Riyadh weren’t available to comment when contacted by Bloomberg on June 6 and yesterday. There was no response to an e-mail to Saudi Aramco’s media department yesterday.

Estimates vary on how much Saudi Arabia needs to produce before the end of the year. IHS projects about 10.3 million and while Societe Generale says between 10.2 million barrels and 10.5 million barres a day in the third quarter. The high of 11 million that Energy Aspects says could be needed from Saudi Arabia would be higher than the quarterly peak of 10.1 million reached in late 1980, according to OPEC data.

“At the time of the last OPEC meeting, there was a fair amount of concern about what would happen if disrupted production in key countries starts to come back in a big way,” said Mike Wittner, the head of oil market research at Societe Generale SA in New York. “It’s not all happening in a big way. It means the market needs the Saudis to produce more crude.”


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Recent credit boom…

Growth of govt lending continues to slow:


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Fearsome revolving credit acceleration underway:


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Sudden breakout here?


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Escape velocity?


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Here it is!

Loans increased when the economy suddenly slowed due to the weather, then continued to increase at about the prior pace:


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And someone’s picking up the slack from these types of lenders?


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And, of course, the big guy, mortgage debt, started to move up a tad but unfortunately seems to have settled back some:


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But with the 0 rate policy, we’re sitting on a powder keg, always on the edge of hyper inflation…

:(

Abenomics Spurs Most Misery Since ’81 as Senior Scrimps

As previously discussed, it’s a case of ‘bad inflation’…

Abenomics Spurs Most Misery Since ’81 as Senior Scrimps

By Isabel Reynolds and Chikako Mogi

June 6 (Bloomberg) — Mieko Tatsunami finds Prime Minister Shinzo Abe’s drive to reflate Japan’s economy hard to digest.

“The price of everything we eat on a daily basis is going up,” Tatsunami, 70, a retired kimono dresser, said while shopping in Tokyo’s Sugamo area. “I’m making do by halving the amount of meat I serve and adding more vegetables.”

Tatsunami’s concerns stem from the price of food soaring at the fastest pace in 23 years after April’s sales-tax increase. Rising prices helped push the nation’s misery index to the highest level since 1981, while wages adjusted for inflation fell the most in more than four years.

With food accounting for one quarter of the consumer price index and the central bank looking to drive inflation higher, a squeeze on household budgets threatens consumption as Abe weighs a further boost in the sales levy. The prime minister may be forced to ease the pain with economic stimulus, cash handouts or tax exemptions championed by his coalition partner.

“Price hikes without confidence that wages are going to rise will hurt appetite for spending,” said Masamichi Adachi, senior economist at JPMorgan Chase & Co. in Tokyo. “Abe has to raise people’s belief that the economy will improve.”

Food prices rose 5 percent in April from a year earlier, with fresh food climbing 10 percent. Onions soared 37 percent, and salmon — a staple of the nation’s lunch boxes — jumped 30 percent. Abe lifted the sales tax by 3 percentage points on April 1.

Greenhouse Vegetables

The yen’s 5 percent fall against the dollar over the year through April boosted the cost of imports in a nation that is only 39 percent self-sufficient on a calorie basis and more reliant on inbound shipments of fossil fuels after a nuclear disaster in 2011.

The cost of imported beef rose to 230 yen ($2.24) for 100 grams at stores in central Tokyo in April from 187 yen a year earlier, government data show. Growing vegetables in greenhouses is more expensive as a result of increased energy prices, according to Naoyuki Yoshino, the Tokyo-based dean of the Asian Development Bank Institute.

Yasunari Ueno, chief market economist at Mizuho Securities Co. in Tokyo, said food inflation likely accelerated in May and will remain high.

As Abe aims to create a “virtuous cycle” of rising production, incomes and spending, the Bank of Japan is targeting 2 percent inflation — stripped of the impact of the higher sales tax. Its key gauge of prices excluding fresh food rose 3.2 percent in April from a year earlier.

Tax Exemptions

Even so, the prime minister’s drive to fatten paychecks more than inflation is at risk of stalling, with wages excluding overtime and bonus payments falling for a 23rd straight month in April.

Goldman Sachs Group Inc. sees base wages rising about 0.5 percent on year from May as salary gains from spring labor negotiations take effect — lagging the median forecast for 2.6 percent inflation this year in a Bloomberg News survey of economists.

The misery index, which adds the jobless rate — 3.6 percent — to overall inflation — 3.4 percent — climbed in April to 7, a 33-year high.

The squeeze on households could damage support for Abe’s administration, whose approval rating fell to 53 percent in a Nikkei survey in May from 62 percent when he took power in December 2012.

“The effects of Abe’s policies are kicking in and very soon people will start to take notice,” said Koichi Nakano, a professor of political science at Sophia University in Tokyo. Abenomics isn’t really trickling down to their wallets, he said.

Economic Stimulus

As Abe considers corporate tax cuts, he faces pressure from his coalition ally New Komeito to exempt food should he go ahead with plans to raise the sales levy further to 10 percent in October next year from 8 percent.

Mizuho’s Ueno said an option for Abe would be to provide more cash handouts to help low-income households, which would run counter to the government’s effort to reel in the world’s largest debt burden.

With higher food prices, people will cut back on durables, luxury goods and eating out as they did after the sales tax was last increased in 1997, the ADBI’s Yoshino said. “A government stimulus package is needed to compensate for the consumption decline.”

The elderly, many of whom are on fixed incomes, may be hit the hardest, said Hideo Kumano, executive chief economist at Dai-ichi Life Research Institute in Tokyo. Kumano estimates households headed by people over age 60 accounted for nearly half the nation’s consumption last year.

“If prices keep rising, there is a risk that consumption by seniors may be damped as they don’t enjoy the benefit of wage increases,” Kumano said.

Kumano’s concerns are reflected in Sugamo, an area of northern Tokyo bustling with elderly shoppers like Tatsunami.

“Abenomics may be helping the big corporations, but life’s tough for people like me,” said Tatsunami, who has seen her pension shrink. “We don’t go out as much as we did — we’re having to cut back.”

Mexico cuts rates

Little do they know that lowering rates removes interest income from the economy and on the supply side lowers costs and lowers forward prices, thereby reducing inflationary forces…

Mexico central bank unexpectedly cuts rate to spur weak economy

By Michael O’Boyle and Alexandra Alper

June 6 (Reuters) — Mexico’s central bank unexpectedly slashed interest rates to a record low on Friday, saying a sluggish economy gave it room for a one-off cut to spur growth without fanning inflation pressures.

The Banco de Mexico cut its benchmark interest rate by 50 basis points to 3.00 percent, surprising 21 analysts who had unanimously forecast in a Reuters poll that rates would stay on hold.

Latin America’s No. 2 economy barely grew in the first quarter as a harsh winter dragged on growth in the United States, Mexico’s top trading partner, while Mexican tax hikes hit domestic demand.

“Given the greater margin of slack in the economy, the efficient convergence of inflation towards 3 percent is feasible with a lower reference interest rate,” the central bank said in a statement.

Policymakers said they did not expect to further cut rates, suggesting even lower borrowing costs would not be prudent since the United States is expected to begin a tightening cycle and growth in Mexico is forecast to pick up.

The bank’s move stunned markets. Traders reported chaos on trading floors. Mexican bond yields tumbled and the stock market rose to its highest level this year, while the peso currency briefly hit a session low.

Prices for the county’s benchmark 10-year peso bond jumped, pushing down its yield by 33 basis points in the biggest one-day drop since last September. “Banks were really caught off guard,” said one Mexico-based bond broker. The cut was surprising given the bank’s conservative reputation. Analysts speculated the decision was split, reasoning that Gov. Agustin Carstens likely pushed for a bold cut, overriding concerns of other board members about inflation.

In its decision, the central bank said inflation risks have lessened. Annual inflation has been falling since it spiked above the central bank’s 4 percent limit in January, largely due to new taxes on soft drinks and fast food.

But policymakers said there were still risks that economic growth could slow after a weaker-than-expected start to the year. Last month the government cut its estimate for annual growth in 2014 from 3.9 percent to 2.7 percent.

The central bank said despite stronger exports, it was still worried about weakness in domestic spending.

The country’s central bank had not been expected to lower its main rate so far below the current inflation rate, which was 3.44 percent in the 12-month period though mid-May.

In previous years, sharp drops in the peso currency have made Mexican interest rate cuts risky since lower borrowing costs could push yield-hungry investors to dump Mexican fixed income assets and further hurt the currency.

A weak currency can spur inflation through higher import prices. Analysts said the central bank was taking advantage of renewed calm in financial markets and the recent dip in inflation to shore up economic growth.

“They seized the moment,” said Delia Paredes, an economist at Banorte bank in Mexico City. “It was quite a surprise.”