Above expectations and indicative of continuous modest growth. However, I have trouble making it all ‘add up’. More comments below:

Highlights

Employment growth is strong and it is not entirely without wage pressure. Nonfarm payrolls rose 223,000 in May to just top Econoday’s high estimate while the unemployment rate moves down a tick to a new expansion low of 3.8 percent. The monthly gain for average hourly earnings came in at the high end of expectations, up 0.3 percent for a year-on-year rate that is up a tenth to 2.7 percent.

Payroll gains are led by trade & transportation, up 53,000 in the month for a sector where delivery delays have been climbing, and include solid 31,000 gains for both retail and also professional & business services with the gain for the latter suggesting that employers are scrambling to fill positions. Manufacturing payrolls rose 18,000 which hits Econoday’s consensus with construction payrolls up 25,000.

The participation rate moves down a tenth to an even thinner 62.7 percent as the number of people actively looking for work is down 281,000 to 6.065 million. The workweek for all employees is unchanged at 34.5 hours though factory hours and factory overtime are down which point to give back for May’s industrial production report.

But today’s report is about strength and the risk that available slack in the labor force is disappearing and in turn raising the potential of wage inflation. The results clearly support expectations for a rate hike at this month’s FOMC.

The federal government continues to reduce headcount:

Seems the deceleration in payroll growth reversed around year end, perhaps in reaction to the change in tax laws:

This dropped dramatically with the 2008 recession, recovered only modestly, and most recently seems to have leveled off at historically low levels:

The participation rate began falling with the recession, leveled off for the last two years, and has yet to recover:

Wage growth shows a lack of demand as well:

Unemployment as defined has hit a multi cycle low even with weaker wage growth and weaker GDP growth.

Might have something to do with healthcare? Increasingly health insurance is available only through employment? Maybe there’s been a reduction of illegal workers which would also explain in part the reduction in productivity?

And this chart shows that 4.3 million people took jobs last month who previously were not classified as unemployed and were not even considered as part of the labor force:

Highlights

A rebound in multi-family units helped drive construction spending 1.8 percent higher in April to fully reverse the prior month’s 1.7 percent decline. Spending on multi-family units rose 3.6 percent in the month following March’s 4.3 percent decline in a gain, however, that can’t overshadow no change for spending on single-family homes. But home improvements were a big positive rising 0.7 percent in the month.

Non-housing data are mixed with private nonresidential, led by transportation and power, up a strong 0.8 percent but with highways & streets down 1.0 percent.

This report is often very volatile making year-on-year readings useful to gauge trends. And there is clear strength here, with total spending up 7.6 percent including a very strong 9.6 percent gain for single-family homes that puts April’s no change in perspective. Housing is in short supply which has been holding down home sales and the question for the sector is whether builders can pick up their pace to meet demand.

This chart is not adjusted for inflation. On an inflation adjusted basis it’s still short of the prior cycle highs:

Spending was up, but unfortunately due to higher gas prices, which were paid for by further dipping into savings that were already far too low. So looks to me like q2 is off to a very uncertain start after a weak q1:

Highlights

Income isn’t quite as soft and spending isn’t quite as strong as they look while inflation readings are modest and steady. Income rose 0.3 percent in April but the wages & salaries component shows a solid 0.4 percent gain. Spending jumped 0.6 percent in the month led, however, by a 0.9 percent gain for nondurables which reflects April’s rise in gas prices.

Both the overall PCE price index and the core rose 0.2 percent in the month, the latter edging above Econoday’s consensus by 1 tenth, with the year-on-year rates hitting expectations, at 2.0 percent overall and 1.8 percent for the core.

Of note for the core is a revision to March’s year-on-year rate which has been downgraded to 1.8 percent. Also of note is a 2 tenths dip in the savings rate to an even lower 2.8 percent which suggests April’s spending, to a degree, was funded at the expense of savings.

Yet gas-driven or not, the rise in spending marks a strong opening for second-quarter consumer spending and, together with yesterday’s big improvement in April goods trade, are both early indications of strength for second-quarter GDP. More fundamentally, concerns in yesterday’s Beige Book that consumer spending was moderating look perhaps unwarranted and that steady growth, backed by respectable income, is now the more accurate description. For inflation, no alarms in this report with the overall rate holding on target for a second straight month but room still left to run for the core in its awaited approach to the Fed’s 2 percent line. Note that the Fed’s goal is to bring both the overall price index and the core to the 2 percent target and then to hold them there as steady as possible.

While the trade deficit was small than expected, the drop was due to weak US imports, which doesn’t bode well for domestic demand or for foreign economies:

Highlights

Second-quarter net exports open up on the positive side, at a goods deficit of $68.2 billion in April vs $68.6 in March and far better than expectations which were calling for a much deeper $71.0 billion deficit.

But the mix of the results are less favorable as exports of goods fell 0.5 percent to $139.6 billion reflecting sharp slowing for vehicles and also capital goods that offset gains for industrial supplies and especially food products. The import side is more favorable, falling 0.5 percent to $207.8 billion after March’s 1.5 percent decline with consumer goods falling very sharply, down 5.3 percent after March’s 1.7 percent dip.

The decline in exports aside, today’s results are positive and should give a lift to early estimates for second-quarter GDP.

Yen:

Euro:

There is now growing evidence that the economy’s deceleration that followed the collapse of oil related capital expenditures at the end of 2014 continued for about two years after which it reversed course.

This means the collapse in private sector deficit spending was replaced by other sources of deficit spending, some of it public, the rest private. The increase in private sector deficit spending was apparently not bank financed, as indicated by bank lending statistics, so seems it must have been done in the capital markets.

First quarter weakness, if not reversed in q2, would indicate the contribution of private sector deficit spending is fading, as happened with consumer credit:

The resumption of oil capex is part of the answer:

Note the dip followed by a recovery:

This is not contributing to the apparent reversal:

Highlights

Consumer credit came in on the low side of expectations, up $11.6 billion in March with February revised $3.0 billion higher to $13.6 billion. Revolving credit is once again the weak spot, down $2.6 billion in the month following a $0.5 billion decline in February. Weakness in revolving credit, which includes credit cards, explains at least part of the slowdown in first-quarter consumer spending. Non-revolving credit, which includes both student loans and vehicle loans, rose $14.2 billion in both March and February.

Interesting reversal- historically happens after a recession:

Auto sales continue to slow:

The BEA released their estimate of April vehicle sales this morning. The BEA estimated sales of 17.07 million SAAR in April 2018 (Seasonally Adjusted Annual Rate), down 1.7% from the March sales rate, and up slightly from April 2017.
Read more at http://www.calculatedriskblog.com/#kXZuxyjWLR2MW4ME.99

Light truck sales were slowing until getting a boost from the hurricanes:

As previously discussed, something has to give to bring the savings rate inline, and the low reported personal consumption expenditures are a step in that direction, and housing has also been soft, as were prices. Also, while inventory building adds to GDP, combined with slower sales growth it doesn’t bode well for the future:

Highlights

A sharp rise in service spending helped keep first-quarter GDP in the respectable range, at an annualized 2.3 percent rate and 3 tenths above Econoday’s consensus. Service spending contributed nearly 1 full point to the result and offset a sharp decline in spending on durables. Consumer spending in total rose at a 1.1 percent pace, subdued but still positive.

Business spending also helped the quarter, contributing 8 tenths of a point with strength here including both structures and equipment. But residential investment, after spiking in the fourth quarter, couldn’t pull its weight and contributed zero to the latest quarter.

Inventories, which had been too low relative to demand, are a welcome positive in the report, rising $33.1 billion and adding 4 tenths to the quarter. Imports are once again the biggest negative, subtracting 4 tenths in a quarter that marked the imposition of metal tariffs. But in more than an offset, exports rose 0.6 percent to make for a 6 tenths positive contribution from net exports. Government purchases are also a positive, adding 2 tenths.

Price readings are a negative surprise in the report, with the chain-weight GDP price index rising at only a 2.0 percent rate which is well short of expectations for 2.4 percent.

It was a moderate quarter for the economy especially for the consumer whose spirits waned a bit despite the big tax cut and continuing strength in the labor market. As for spending, given the moderate gains for services in February and January, the strength in this component in today’s report implies a sharp gain for services in Monday’s personal income & outlays report which will unbundle March’s contributions to the quarter. Also note the decline in durable spending largely reflects the quarter’s soft showing for vehicle sales which however did show promise going into April with the first indication on second-quarter consumer spending coming from next week’s unit vehicle sales results.

Growth has stabilized after dropping by about 4.5% which is about $570 billion per year or about 3% of GDP per year:

Last month revised up, but this month down that much and more, indicating q1 was weaker than first reported:

Highlights

Construction spending data are known for their volatility which should limit the surprise from a very unexpected 1.7 percent decline in March, far below Econoday’s consensus range. The housing sector is the weakness in the report with residential spending down 3.5 percent in the month including dips for both single-family homes, down 0.4 percent, and multi-units, down 2.7 percent. Home improvements, which have been soft, fell 8.0 percent in the month.

But the minus signs don’t stop here with private non-residential spending, held down by continuing weakness in factory spending and a monthly downturn for commercial spending, falling 0.4 percent in the month. Spending on public building is mixed with highways & streets showing a gain offset by a flat result for educational building.

Today’s data are a surprise for forecasters but are offset by a heavy upward revision to February, now at plus 1.0 percent from an initial 0.1 percent gain, and may paradoxically build up expectations for a construction rebound in coming reports. Watch for housing comments in tomorrow’s FOMC statement and also construction payrolls, which have been strong, in Friday’s employment report.

Another chart that indicates we could already be in recession:

Yet another source of credit growth for 2017 I hadn’t seen:

Smartphone sales have been a substantial source of US GDP growth: