Federal Reserve Bank of Atlanta

Summary of Economic Activity

Sixth District business contacts indicated that economic activity expanded at a moderate pace since the previous report. On balance, the outlook among firms for the remainder of the year was positive, despite some uncertainty surrounding trade policy. Firms continued to cite hiring challenges, especially for low-skilled and hourly positions. Some businesses reported growing wage pressure. Rising nonlabor costs for select inputs such as transportation and steel were noted, as was an improved ability to pass through price increases. Retailers reported growth in sales, and automotive dealers indicated sales were up year-over-year. Tourism in the District was described as solid over the late summer months, on balance. Residential builders and brokers indicated modest growth compared with year-ago levels; however, diminished lot and land inventory constrained builders' ability to meet demand. Commercial real estate contacts reported strong demand. Manufacturers noted increases in new orders and production.

Employment and Wages

Business contacts reported that labor market growth in select regions was being restrained by firms' inability to recruit staff, particularly among the low-skill/hourly workforce. In response, firms shared plans to move to locations with larger labor pools, to change/reduce personnel standards and requirements, or continue to pursue automation to replace workers.

Contacts continued to report that wage pressure was growing; however, increases greater than 2 to 3 percent remained targeted, rather than broad-based. In response, firms continued to approach compensation creatively (e.g., offer enhanced flexibility, use bonuses and other incentive pay, and offer profit sharing or other forms of temporary compensation that can be discontinued if necessary). Reports from some firms indicated that they were unable to pay the higher wages demanded by experienced job seekers. Instead, they shifted their focus on higher margin business lines or planned to "wait it out" and not to fill the positions.

Prices

Businesses across the District continued to report some increases in nonlabor input costs, specifically relating to transportation and steel, noting slightly more ability to pass along these price increases than in the previous report. Anticipation of rising costs related to tariffs continued to contribute to vendor price increases for commodities. The Atlanta Fed's Business Inflation Expectations (BIE) survey showed year-over-year unit costs were up 2.0 percent in August. Survey respondents indicated they expect unit costs to rise 2.1 percent over the next twelve months.

Consumer Spending and Tourism

District retail contacts reported growth in sales volume since the last report. Solid tourism activity was cited as benefiting retailers and heavily influencing sales activity in some markets. Retailers expect continued positive momentum for the remainder of the year. Automobile dealers reported an increase in year-over-year sales volume.

On balance, District tourism and hospitality contacts reported a strong summer season compared to the same time last year. Summer was robust for Florida tourism activity as occupancy and average room rate surpassed expectations. However, August turned in some mixed results as West Coast beaches were negatively impacted by the "red tide" algae bloom. New Orleans reported a decrease in July occupancy while the average daily rate was up, year-over-year. Preliminary August occupancy reports for New Orleans were stronger than expected. The outlook for the fourth quarter is mixed; some markets expect softer tourism activity year-over-year while others expect growth.

Construction and Real Estate

On balance, reports from District residential real estate contacts indicated modest but ongoing growth. Many builders reported that construction activity was up from the year-ago level. The lack of lot and land availability remained a constraint on building activity. Several contacts stated that even if they had the developed land, construction labor market conditions would keep them from being able to meet current levels of housing demand. District builders expect home sales activity to hold steady over the next few months.

Many District commercial real estate contacts noted continued strong demand. The majority of commercial contractors indicated that on balance, the pace of nonresidential construction activity at least matched the year-ago level, with the exception of retail construction, which was characterized as unchanged to down. Most contacts reported a healthy pipeline of activity, with backlogs greater than or equal to the previous year. Many contacts expressed concerns that uncertainty over increasing materials prices was making bidding and fulfilling projects more challenging. The outlook for nonresidential and multifamily construction among commercial contractors across the District remained positive, with the majority anticipating activity to match or exceed the current level.

Manufacturing

Manufacturing contacts reported strong overall business conditions from mid-July through August. Most firms cited increases in new orders and production. Supplier delivery times were said to be getting longer, while finished inventory levels remained elevated. Uncertainty regarding tariffs and trade policy continued to weigh heavily on manufacturers' sentiment as expectations for future production levels decreased from the previous period. Slightly less than one-third of contacts are expecting higher production over the next six months.

Transportation

District transportation contacts noted increased activity during the reporting period. On a year-over-year basis, railroad traffic was up notably, primarily due to double-digit increases in shipments of grain, petroleum and petroleum products, pulp and paper products, and iron and steel scrap. District ports cited substantial growth in container traffic, breakbulk, and dry bulk freight. Air cargo contacts noted that domestic activity was up due to increased e-commerce shipments; international cargo from Latin America was described as robust, but exports to Europe had softened. Transportation contacts noted no significant disruptions in the movement of freight as a result of changes in trade policy.

Banking and Finance

Earnings continued to improve for financial institutions, driven by a stronger net interest margin. Asset growth continued to slow due to lower demand for credit amid higher interest rates and savings from tax reform. Credit quality remained strong among most financial institutions although underwriting standards loosened for some credit products, particularly residential mortgages. Transaction accounts still comprised the majority of financial institutions' funding, but borrowings were increasingly funding new loan growth.

Energy

Fuel refining capacity utilization continued at a record pace and crude production remained strong. Exports of petroleum products continued to rise. Contacts noted increasing activity offshore in the Gulf of Mexico, including lease purchases for exploration spots. Utilities power generation projects picked up, particularly involving maintenance on power facilities. Utilities sector contacts continued to cite increases in the share of power generation from natural gas. Some contacts expressed concern that tariffs on steel and aluminum may influence the viability of planned industrial construction and plant expansion projects in Louisiana.

Agriculture

Agriculture conditions across the District continued to be mixed. Drought conditions were little changed from the previous report; most of the District remained drought free although there were reports of abnormally dry conditions in much of Louisiana and in parts of Mississippi and Alabama. August production forecasts indicated year-over-year increases in rice, soybean, and cotton, while peanut production was down. Year-over-year prices paid to farmers in June were up for corn, cotton, rice, soybeans, broilers, and eggs, while beef prices were down. However, since the last report, weekly comparisons indicated lower commodity cash prices for some recently tariffed agriculture exports such as soybeans, and the USDA has announced a financial relief program for affected agriculture producers.

Blanchard says the Fed should buy stocks -in addition to treasuries and MBS...during the next down turn. When will this happen? based on the chart below (from the Atl Fed) we are due for one. Everyone loves the new talk about recessions and the latest "25 year business cycles" but how soon does a US recession loom around the corner? When I was speaking in NYC a while back recession was the only topic on the table. Not so much today. Few care to discuss it, and even fewer think it will happen. Animal instincts (economic indicators) aside, we need to seriously consider the next recession, and if that means the Fed begins to buy equities we could have a new era of stability ussured in.  

The following information was originally transmitted by Goldman Sachs research:

Thailand's August headline inflation inched up to 1.6% yoy, from 1.5% in June, led by unfavorable base effects. The reading was above Bloomberg consensus expectations but below ours. Core inflation moderated to 0.7% yoy in August from 0.8% in July. Today's inflation reading takes the annual average of headline inflation (the inflation target measure of the BOT) to 1% yoy, within the 1%-4% target band for the first time since March 2015.







Key numbers: Headline August CPI: +1.6% yoy (+0.2% mom s.a. by GS) vs. Bloomberg consensus: +1.5% yoy; GS forecast: +1.7% yoy; Previous: +1.5% yoy (+0.2% mom s.a.) Core CPI: +0.7% yoy vs. Bloomberg consensus: +0.8% yoy (+0.0% mom s.a.); Previous: +0.8% yoy (+0.0% mom s.a.)

Momentum continued to wane into the second quarter as the anticipated “Ramaphoria”-driven liftoff of the domestic economy failed to materialize. Although economy-wide sentiment got a boost from Cyril Ramaphosa’s appointment to the country’s top post earlier in the year, employment gains have been muted since, while consumer-spending metrics have deteriorated. Moreover, manufacturing output has stumbled in recent months and survey-based data points to sluggishness across the private sector. On the external front, the ongoing global risk-off sent the rand into a freefall in early August and looks bound to fan inflationary pressures over the coming months. Meanwhile, a quarter-on-quarter contraction in the first quarter—held back by a fall in investment and moderating household spending—highlights the economic hurdles facing Ramaphosa as next year’s general election looms. 

• Full-year growth prospects have taken a hit from weak early-year readings, but greater political stability and firm credit ratings should help the economy ride out the remainder of the year with reasonable growth metrics. On the domestic side, real wage gains should support stronger household spending this year while the government’s push to attract investment should bolster capital outlays. On the other hand, fiscal slippage and a slow reform agenda are likely to constrain growth over the medium term. FocusEconomics analysts expect growth of 1.5% in 2018, down 0.1 percentage points from last month’s forecast, and 2.0% in 2019. 

• Inflation climbed to 4.6% in June (May: 4.4%) on growing pass-through pressures from the weak rand, and higher global oil prices are expected to keep it elevated through the remainder of the year. FocusEconomics analysts see inflation averaging 4.7% in 2018 and 5.1% in 2019. • On 19 July, the South African Reserve Bank (SARB) kept the repurchase rate unchanged at 6.50%, in line with market expectations. Officials, however, took a more hawkish stance in the face of the global risk selloff’s pressure on the rand, making clear that a rate hike could be on the table before year-end should it fuel inflationary pressures. That said, a majority of FocusEconomics analysts see the SARB staying put over the short term in an effort to spur economic growth. Consensus is for the repurchase rate to end this year at 6.53% and 2019 at 6.64%. 

• On 17 August, the ZAR traded at 14.78 per USD, 11.8% weaker than on the same day last month as contagion from Turkey’s lira crisis spread to the rand. Investors have fled the currency over concerns about the economy’s dollar-denominated debt. Despite the prospect of further riskoff this year amid mounting global trade fears, still-solid fundamentals look set to cushion the rand. The rand is seen ending this year and next year at 13.27 and 13.06 per USD, respectively.

Analysis from Focus Economics

• The economic recovery is gathering pace mostly due to OPEC’s decision to increase oil production in order to keep markets adequately supplied and high oil prices, which have stoked activity in the all-important oil sector. Moreover, the recovery is broadening as the impact of the VAT implemented in January fades, and gains from the recovery in the oilsector are slowly trickling down to the rest of the economy. The nonhydrocarbon PMI hit a six-month high in June, while credit growth and foreign reserves improved in Q2. Higher production and oil prices are also translating into an improvement in the government’s fiscal position and the current account balance, which recorded a healthy surplus in Q1. On the flip side, the government’s Saudization policy, which is expelling foreign workers, could create labor shortages in some sectors, while the crackdown on corruption implemented last year is deterring investment and spurring capital outflows. Rising oil production and higher prices for the black gold will fuel this year’s economic recovery. However, the VAT implementation that disrupted activity at the outset of the year, persistent regional threats and domestic political unrest will weigh on growth this year. FocusEconomics Consensus Forecast panelists expect growth of 1.7% in 2018, which is up 0.1 percentage points from last month’s projection. In 2019, growth is seen picking up pace to 2.3%. Inflation fell from 2.3% in May to 2.4% in June. A relatively strong currency and firms cutting prices to spur sales are exerting downward pressure on inflation. Panelists project that inflation will average 3.3% in 2018 before moderating to an average of 2.4% in 2019. The riyal has been officially pegged to the U.S. dollar at a rate of 3.75 SAR per USD since January 2003. That said, the currency has had a de facto peg to the greenback since 1986. To defend the currency peg against the USD, the Saudi Arabian Monetary Authority hiked its repo and reverse repo rates by 25 basis points on 13 June following a similar decision by the U.S. Federal Reserve on the same day. Our panelists do not foresee a change in the current exchange rate system during the entire forecast horizon, which ends in 2022.

REAL SECTOR | Non-oil PMI jumps to six-month high in June The Purchasing Managers’ Index (PMI) sponsored by Emirates NBD and produced by IHS Markit rose from 53.2 in May to 55.0 in June. June’s print represented the highest reading so far this year. Therefore, the index remains above the 50-threshold that indicates expansion in business activity in the non-oil private sector. June’s increase was driven by stronger output growth and a healthy expansion in new orders. Solid growth momentum translated into higher backlogs of work. Despite the overall improvement, job creation increased only marginally. On the price front, higher prices for raw material boosted input prices faced by Saudi companies. That said, output charge inflation declined due promotional activities in June.

“The rise in the headline PMI to the highest level this year reflects a strong recovery in new orders (including export orders) and output. Firms had been anticipating this for several months, as reflected in the very strong ‘future output’ readings since February. It isn’t surprising then that the future output index declined sharply in June, with most firms now expecting their output to be relatively stable over the next twelve months.”

- Khatija Haque, Head of MENA Research at Emirates NBD

Oil is back in a big way - investments are picking up and many are going deep. The current US administration is heavy on fossil fuels and that has reinvigorated supply and demand. Of course the tariffs send a message counterproductive to this. It’s hard to think about how many oil and gas exports we are missing out on because of the tariff scare.

- Chad Hagan

"Increased supply pushed oil prices down over the past three weeks"

+ Despite somewhat stronger global demand expectations, a perceived loosening in supply led to a fall in oil prices over the past three weeks. In 2018:Q2, increasing demand expectations and decreasing anticipated supply led to rising oil prices.

+ Developments in global demand expectations since 2017:Q3 have reversed the largely supply-induced weakness in oil prices throughout the first half of 2017

+ Overall, since the end of 2014:Q2, both lower global demand expectations and looser supply have held oil prices down, though this trend seems to have reversed in 2016:Q2 and 2016:Q4, and notably since 2017:Q3.

See Link To Report

Ukraine’s recovery appears to have persisted in the second quarter, after growth picked up at the outset of the year. Domestic demand is expected to have remained in the driver’s seat in Q2: The sustained easing of inflationary pressures, coupled with improving labor market dynamics and strong remittance inflows, likely buttressed private consumption. In addition, household lending surged in the first half of the year against an increasingly stable banking sector. Meanwhile, the IMF has backed the country’s revised plans for an anti-corruption court after the amended law was approved by the Rada on 12 July. On a less positive note, in a move likely influenced by next year’s presidential and parliamentary elections, the government recently extended the gas-price freeze until the beginning of September, once again failing to fulfill one of the Fund’s key conditions and thereby reducing the prospects of receiving another tranche of funding in the coming months. • Domestic demand should remain healthy and lead the sustained recovery this year amid heavy investment activity and robust household consumption growth. Nevertheless, downside risks are significant and stem from mounting political tensions domestically and slow reform momentum. FocusEconomics panelists see GDP rising 3.1% in 2018, unchanged from last month’s forecast, and 3.1% again in 2019. • Inflationary pressures continued to ease throughout the second quarter, with inflation down to 9.9% in June from 11.7% in May, marking the lowest reading since September 2016. Our panelists expect inflation to remain elevated amid firm energy prices and recovering domestic demand. Inflation is seen closing 2018 at 9.3% and dropping to 7.2% by the end of 2019. • At its 12 July meeting, the National Bank of Ukraine unexpectedly hiked the key policy rate by 50 basis points to 17.50%. The decision came against the backdrop of heightened upside risks to short- and mediumterm inflation and elevated inflation expectations; a further rate hike in the second half of the year is unlikely. Our panelists forecast the rate to end 2018 at 16.30% and 2019 at 13.67%. • The hryvnia exhibited some weakness against the U.S. dollar in recent weeks. On 27 July, the UAH traded at 26.73 per USD, 1.6% weaker month-on-month. Nevertheless, since the beginning of the year the hryvnia has gained 5.1% on the USD and has been among the world’s best performing currencies this year. Our panelists see the hryvnia ending the year at 28.39 per USD and weakening to 29.75 UAH per USD at the end of 2019.

Production is forecasted to remain above consumption.

From Focus Economics:

Prices fell to multi-year lows in July as China imposed retaliatory tariff s on U.S. soybean exports. On 6 July, soybeans traded at USD 843 cents per bushel, which was down 12.1% from the same day last month. The price was 8.3% lower on a year-to-date basis and was down 11.7% from the same day last year. On 6 July, the U.S. imposed widely-anticipated tariff s on imports from China, leading the Asian giant to retaliate with tariff s of its own, including on soybean imports from the United States. China is the world’s largest consumer of soybeans, so the increased cost of sending supplies there for U.S. farmers, coupled with broader concerns of the depressing eff ect of a trade war on the global economy, has hit market prices. Moreover, on 12 June, the U.S. Department of Agriculture upwardly revised its projection for world soybean production for the season ending in 2019. Prices are expected to recover as demand from China for the world’s supply of soybeans, despite higher tariff s on U.S. imports, will continue to remain high. For Q4 2018, panelists expect prices to average USD 1,010 cents per bushel. For Q4 2019, panelists project prices will average USD 1,056 cents per bushel.

Outlook is stable...FocusEconomics: Japan

Recent data corroborates that the anticipated recovery in Q2 was likely weaker than expected. Subdued wage growth continues to dent consumer confidence. Industrial production, furthermore, declined in May for the first time in four months. However, with a smaller-than-expected drop in industrial production and robust export growth in June, external demand appears to be fueling activity within Japanese factories. Leading indicators for Q3 signal that economic activity will remain relatively weak, mostly reflecting mounting global economic uncertainties. The Tankan survey for manufacturers showed a less positive assessment of the country’s economic outlook as trade barriers increase globally and geopolitical risks threaten to strengthen the yen. On the upside, the 2020 Tokyo Olympics is boosting capital expenditure, providing stimulus to the economy, while the new trade deal with the European Union should support the external sector. Despite decelerating from 2017’s outstanding performance, the economy should continue to expand at a brisk pace this year, supported by the Bank of Japan’s (BoJ) ultra-loose monetary policy, a tightening labor market and construction projects related to the 2020 Tokyo Olympics. Rising protectionism globally and a sharp appreciation of the yen due to persistent geopolitical threats are the main downside risks to the outlook. FocusEconomics panelists see the economy growing 1.1% in 2018, which is unchanged from last month’s forecast, and 1.0% in 2019. Inflation stabilized at May’s 0.7% in June. Although the economy is running above potential, inflationary pressures remain subdued on the back of sluggish household consumption, and are mostly supported by higher energy prices. FocusEconomics panelists expect inflation to average 1.0% in 2018, which is unchanged from last month’s estimate. Next year, the panel sees inflation inching up to 1.2%. • The BoJ left its ultra-loose monetary policy program unchanged at its 14–15 June meeting, as expected. At the upcoming 30–31 July meeting, the Bank will release its quarterly economic review, in which the BoJ could decide to yet again push back when it expects to meet its inflation target. A large majority of our FocusEconomics panelists expect the BoJ’s shortterm policy rate to remain unchanged at minus 0.10% until at least the end of 2019. The yen has depreciated to a six-month low in recent days despite rising geopolitical tensions; the yen usually acts as a safe-haven asset during episodes of uncertainty. This time, however, widening interest-rate differentials with the U.S. likely spurred the weakening. On 20 July, the currency traded at 111.4 JPY per USD, a loss of 1.0% compared to the same day in June. Panelists see the yen trading at 109.5 JPY per USD at the end of 2018 and at 106.3 per USD by the end of next year.

++

Charts listed below are from Mizuho Research Institute, Ltd. 

COTTON
In recent weeks, prices have fallen substantially due to trade tensions. On 6 July, the spot price was USD 79.4 cents per pound, which was down 6.9% from the same day last month. However, the price was 4.0% higher on a year-to-date basis and was up 19.4% from the same day last year. Prices dropped recently due to concerns over the impact of the 25% tariff China imposed on U.S. cotton exports effective 6 July, which will likely lower demand. China, the world’s largest consumer of cotton, strongly affects markets, and prices are unlikely move significantly going forward. Our panelists expect prices to average USD 85.9 cents per pound in Q4 2018. In Q4 2019, panelists expect prices to average USD 79.8 cents per pound. 

WOOL
Wool prices rose throughout most of June, likely on solid demand from key consumer China and tight supply. However, prices pulled back in early July as the new selling season began. On 6 July, wool traded at AUD 2,027 cents per kilogram. The print was 0.4% higher than on the same day last month and was up 15.2% on a year-to-date basis. Moreover, the price was 33.0% higher than on the same day last year. Prices are seen dipping from their elevated levels going forward, as the new season brings fresh supply to market. FocusEconomics panelists project an average price of AUD 1,675 cents per kilogram in Q4 2018. Prices are projected to ease further, to AUD 1,624 cents per kilogram, in Q4 2019.

WTI BLENDS
WTI Crude Oil prices hit their highest level since November 2014 on 26 June on the back of a tightening U.S. oil market and political tensions with Iran. In the following days, prices fell slightly, trading on 6 July at USD 73.8 per barrel. The print was up 13.9% from the same day last month and was 22.0% higher on a year-to-date basis. Moreover, the price was up 62.1% from the same day last year. Oil prices rallied from the second half of June following a soft patch at the end of May, when prices were aff ected by oversupply concerns. Since then, declining inventories in the United States and fears that the U.S.-led sanctions against Iran could reduce global oil output propelled WTI Crude Oil prices. Moreover, a U.S. economy fi ring on all cylinders is ensuring strong demand for oil. In the fi rst days of June, oil prices moved sideways, and, according to a release from 5 July, the United States unexpectedly posted a small crude build of 1.2 million barrels per day in the week ending 29 June. Moreover, U.S. President Trump is pressuring OPEC countries to pump more oil to lower prices, further rattling oil markets.

BRENT CRUDE

Strong oil market fundamentals and mounting geopolitical threats led Brent Crude Oil prices to increase in recent weeks. The price of Brent Crude Oil, however, could not breach the USD 80 per barrel psychological mark as it did in late May. On 6 July, oil prices traded at USD 75.1 per barrel, which was up 2.5% from the same day last month. The benchmark price for global crude oil markets was 12.5% higher on a year-to-date basis and was up 54.7% from the same day last year. The U.S. is pressuring Iran’s oil buyers to “reduce to zero” their oil imports from the country by 4 November, triggering undersupply fears. These concerns a re exacerbated by Iranian threats of cutting off regional oil exports. Around 30% of global oil exports pass through the Iranian coast. Venezuela’s oil production, furthermore, continues to slip, and drawdowns in U.S. crude inventories remain high, adding upward pressure on oil prices. Saudi Arabia, however, pledged to increase supply as early as in July to alleviate shortage concerns. Moreover, OPEC and Russia declared that they will reduce their compliance level to the oil cap deal from around 150% to 100%, which implies an injection of around 700,000 barrels per day.

Note from Chad- 

Prof. Steve Hanke called for a $75.00 end of the year price (perhaps for WTI, since Brent is closing in on $75 pb) that correlates the prices of gold and crude, respectfully. I haven’t used this tool before but I would it seems  comprehensive enough. I expect Brent and WTI will increase in price before settling towards the $70-$80 mark by the end of this year. 

Data and Forecasts from Focus Economics

Finland's Economic Update July 2018 

In the first quarter of 2018, the economy maintained its growth momentum from Q4 2017, with quarter-on-quarter growth accelerating to an over seven-year high. This was due to fixed investment surging on the back of higher private sector investment. Moreover, government consumption increased in Q1, contrasting the fall in Q4. However, although unemployment decreased, and consumer confidence hit record highs, private consumption growth decelerated in Q1 from Q4. This may have been due to high household debt levels weighing on consumer spending. The external sector, for its part, detracted from growth. Meanwhile, the economy had a weak start to Q2. In April, economic activity expanded year-on-year at the slowest pace since August 2016. The current account balance also logged a deficit for the second consecutive month in April.  An expansion in private consumption should support economic growth in 2018 as unemployment dips from 2017. Moreover, accommodative monetary policy and high business confidence are seen supporting an expansion in fixed investment. However, the government’s ongoing fiscal consolidation will likely constrain government consumption growth. FocusEconomics panelists expect GDP growth of 2.7% in 2018, which is up 0.2 percentage points from last month’s forecast, and 2.2% in 2019. Harmonized inflation accelerated to 1.1% in May from 0.8% in April. Our panelists see harmonized inflation averaging 1.1% in 2018 and 1.3% in 2019.

REAL SECTOR | Economic activity growth takes a breather in April 

Economic activity grew a working-day adjusted 1.8% in April compared to the same month last year, down from a significantly revised 4.0% in March (previously reported: +3.1% year-on-year) and the lowest growth rate since August 2016. This is according to the latest monthly Trend Indicator of Output released by Statistics Finland. The weaker result in April came as services production, the largest output category in Finland, registered a slower pace of growth of 2.0%, down from 2.9% in March. Moreover, secondary production, which comprises the manufacturing and construction sectors, grew 1.3% in April, down substantially from 6.3% in March. Meanwhile, primary production was solid in April, growing 8.1% (March: +2.6% yoy). A month-on-month comparison shows that economic activity on a seasonally adjusted basis contracted 0.9% in April, in contrast to the revised 0.9% expansion in March (previously reported: +0.6% month-on-month). Average year-on-year growth in economic activity ticked down to 2.9% in April from 3.0% in March.

Comprehensive data confirmed that the Eurozone economy lost steam in Q1, growing at the weakest pace since Q2 2016. The external sector was primarily behind the slowdown, with a strong euro and slowing global recovery fueling a decline in overseas sales. Data for Q2 suggests that momentum has regained some lost ground, although growth is likely still below last year’s highs. The unemployment rate hit a new multi-year low in April, and strong services sector growth pushed the composite PMI up in June. That said, data for the manufacturing sector has been weak, with industrial production contracting in May and the manufacturing PMI falling to an 18-month low the month after. Moreover, the outlook for the sector has turned gloomier in recent weeks. On 22 June, U.S. President Donald Trump threatened to slap a 20% tariff on all European Union manufactured automobiles if retaliatory tariffs on U.S. goods enacted by the EU were not lifted. While the U.S.’s initial tariffs on steel and aluminum are expected to have a relatively small economic effect, the automobile industry is a much larger sector and tariffs could dampen manufacturing activity. FocusEconomics panelists cut 0.1 percentage points off the Eurozone’s growth forecast for 2018 this month and now see GDP growing 2.2% in 2018. A weak first quarter and rising political risks are dampening the outlook, although growth is expected to remain healthy overall thanks to a solid domestic economy. In 2019, the economy is seen expanding 1.9%. Harmonized inflation jumped from 1.3% in April to 1.9% in May amid higher energy costs. As a result, inflation is around the ECB’s target of close to 2.0%. Our panel sees inflation averaging 1.6% in both 2018 and 2019.

Amid a healthy recovery and rising price pressures, the ECB announced it was winding down its massive bond buying program on 14 June, with purchases set to end completely after December. However, the Bank still struck an accommodative tone, stating that it plans to hold the refinancing rate at a record-low 0.00% until the end of next summer. The next meeting is set for 26 July. The Consensus Forecast is that the refinancing rate will end 2018 at 0.00% and 2019 at 0.30%.



The euro continued to flounder against the U.S. dollar in June, remaining at some of the lowest values seen in 2018. On 22 June, the euro bought 1.16 USD, weakening 1.2% from the same day last month. Our panel sees the currency ending 2018 at 1.21 USD per EUR and 2019 at 1.26 USD per EUR.

Italy Update

Following three months of political deadlock and two unsuccessful attempts to form a government, on 6 June the Italian Parliament signed off on a government formed by the right-wing League party and the leftist populist Five Star Movement. As the two parties have different ideologies and the coalition agreement is the result of complicated negotiations, governing will not be smooth sailing. The deadlock has been resolved at a time when the recovery seems to have lost some steam. Recent GDP data shows that growth was broadly stable in Q1, but the economy shows some signs of having slowed in Q2, partly affected by subdued growth in the whole eurozone. In April, the industrial sector weakened considerably, and retail sales contracted sharply amid falling consumer confidence. However, NPLs declined further, confirming that the banking sector has indeed turned a corner, and the construction sector rebounded significantly. That said, survey-based indicators deteriorated further in May, a consequence of both weak external demand and the difficult political situation. • Going forward, Italy will navigate in uncharted political territory. Political uncertainty, together with possible financial turbulence, represents the main downside risk to growth, especially in light of the fragility of Italy’s public finances. That said, further improvements in the banking sector should help strengthen business credit and investment, while moderate inflation and employment gains should support consumer spending. FocusEconomics panelists project growth of 1.3% in 2018, down 0.1 percentage points from last month’s forecast, and 1.2% in 2019. • Harmonized inflation rose to 1.0% in May from 0.6% in April. Moderate domestic pressures will restrain inflation, although higher prices for fuels will act in the opposite direction. Our panelists expect inflation to average 1.2% in 2018 and 1.3% in 2019.

Political turmoil

Following months of deadlock, Italy forms a new government but still faces many unknowns Three months after the elections and following two failed attempts to form a government, on 6 June the Italian parliament finally ended the political impasse and voted for a government formed by the populist Five Star Movement (M5S) and right-wing League party. The deadlock was broken when the League accepted to replace their pick for Minister of Finance, Paolo Savona, who was vetoed by the president, with Giovanni Tria, a university professor with a less Eurosceptic profile. Financial markets reacted nervously, sending the 10-year bond yield above 3.0% in the days following the arrival of the new government, although yields declined thereafter. The new coalition’s proposed economic program, based on an agreement reached in mid-May following complex negotiations, is protectionist and fiscally expansionary, including both tax cuts and higher spending. It has, however, vague details on how to provide adequate financing. The proposed measures, combined with Italy’s colossal public debt and already sizeable fiscal deficit, could cause severe financial distress, especially at a time when the European Central Bank is preparing to reduce its monetary stimulus. However, a large degree of uncertainty exists over the extent to which the coalition will be able to enact its program, due to the ideological and territorial differences between the two parties and their electorates. The introduction of a proposed two-tier flat tax (at 15% and 20%) on personal and corporate income could help reduce the country’s heavy tax burden, improve competitiveness and boost both consumer and corporate spending; however, it could also jeopardize government revenues. The proposed guaranteed income, which would provide a minimum income of EUR 780 per month for a single household for a maximum of two years, along with changes to how the retirement age is determined, could increase already bulky public spending and dent labor market participation, which is already at one of the lowest rates in the European Union. In addition, a proposed new hourly minimum wage could raise labor costs for firms, hitting employment. Relations with European institutions will, furthermore, likely become strained under the new government. The coalition program commits the future government to promoting an amendment to existing European treaties that would devolve to member states some of the competences currently held by European institutions. Moreover, it questions EU rules on the fiscal deficit and proposes to exclude investment expenditure from the calculation of the deficit. These proposals, if carried out, could lead Italy to clash with European institutions and other member countries, who are already worried by the possible spillovers from a future mismanagement of public finances by the Italian authorities. In addition, the new coalition controversially wants to lift sanctions on Russia, which were the result of an agreement reached at European level. Further tensions may arise from migration policy. Italy is calling for a revision of the Dublin Treaty and wants to establish more stringent requirements for the reception and expulsion of immigrants. However, an agreement will be difficult to reach, given the existing divisions among EU countries.

July 08, 2018:  -Italy has asked European regulators to extend a state loan-guarantee plan that has helped its banks put a dent in Europe’s biggest pile of non-performing loans.

- Bloomberg Economics 

John Kemp from Reuters released a quality report today on the gasoline rise in America  and national travel.

In the US we have seen a shift to larger SUV style cars due to cheaper gas - in part. When gas surges customers trade in cars and buying habits transition to more fuel efficient cars. This effects car manufacturers sales as well as inland freight costs for hauling other goods. Data suggests this could lead to inflation in the market.  - CH

“Cheap gasoline provided a significant stimulus to driving during the latter part of 2014 and throughout 2015 but the impact has faded as average pump prices have climbed back towards $3 per gallon” 

Chartbook: https://tmsnrt.rs/2tS9i6S

Outlook Remains Stable

The economy appears to have regained some momentum in the second quarter following a weak first quarter, but growth is still mediocre at best. Both the manufacturing and services PMIs picked up in May, although weak new orders growth and gloomier business sentiment bode poorly for the evolution of the services PMI going forward. In addition, consumer sentiment improved in the same month, while in February–April employment continued to surge. On the downside, most new jobs were part-time, with total hours worked declining slightly. In addition, the tight labor market is still not feeding through to significantly higher pay—likely driven by weak productivity. On the political front, Brexit negotiations are making little headway on the key sticking point of the Irish border ahead of an important EU summit at the end of June. This comes against a backdrop of disagreement in parliament over MPs’ role in the Brexit process. 

Looking ahead, growth will remain muted, with fixed investment dampened by Brexit uncertainty and export growth slowing after the boost provided last year by the weaker pound. However, a slight pick-up in government spending and a loose monetary stance should support the economy. Our panelists estimate GDP growth of 1.4% in 2018, unchanged from last month’s forecast, and 1.5% in 2019.

Inflation remained at 2.4% in May, with the downward trend observed in recent months halted by higher fuel prices. Going forward, price pressures should gradually ease as the impact of the weaker pound fades, although gradually rising wage pressures and growing capacity constraints will slow inflation’s return to the Central Bank’s 2.0% target. Panelists expect inflation to average 2.5% in 2018 and 2.1% in 2019. 

The Central Bank left the base rate unchanged at 0.50% at its meeting ending on 20 June, in the face of uncertainty over the strength of the economy and gradually ebbing price pressures. However, the Bank of England (BoE) is still likely to tighten its stance later this year to ensure inflation returns to target. FocusEconomics panelists see the bank rate ending 2018 at 0.72% and 2019 at 1.03%. 

The pound has weakened against the dollar in recent weeks, on the back of the Federal Reserve’s June monetary policy tightening and ongoing Brexit uncertainty. On 22 June, the pound traded at USD 1.33 per GBP, a 1.2% weakening from the same day last month. Looking ahead, the pound is set to strengthen slightly but remain weaker than its pre-referendum levels on lingering Brexit uncertainty. Our panelists see the exchange rate ending 2018 at USD 1.39 per GBP and 2019 at USD 1.44 per GBP.

Services and manufacturing PMIs rise in May...

Pointing to pick-up in economic growth following Q1’s lull Growth in the UK services sector picked up to a three-month high in May, with the IHS Markit/CIPS UK services Purchasing Managers’ Index (PMI) rising from 52.8 in April to 54.0. May’s figure overshot market expectations of 53.0, and means the indicator moved further above the 50-point threshold that separates expansion from contraction. Despite the uptick, in May new orders grew at only a mild pace, with firms pointing to Brexit uncertainty holding back decision-making. In addition, employment growth was subdued, and businesses reported hiring difficulties; this comes amid a tight labor market, with the unemployment rate currently at a multi-decade low. Problems recruiting suitably-skilled staff generated greater wage pressures, which coupled with higher fuel bills saw input costs rise at a rapid pace. Discouragingly, business confidence waned in May, due to concerns over Brexit and consumer demand. Despite May’s improvement, Chris Williamson, Chief Business Economist at IHS Markit, cautioned that it may not last: “disappointing inflows of new work suggest that growth could wane in coming months as Brexit-related uncertainty continues to weigh on spending decisions and dampen business confidence. Measured across all major parts of the economy, new orders growth in the second quarter so far is running at the weakest since the third quarter of 2016.” The IHS Markit/CIPS manufacturing PMI increased from an over one-year low of 53.9 in April to 54.4 in May. As a result, the index moved further above the 50-point threshold that separates expansion from contraction in activity in the manufacturing sector, where it has been since August 2016. May’s rise was driven by faster growth in output. On the other hand, growth in new orders and employment eased, with the expansion in new orders dipping to the slowest in 11 months on a softer domestic market. Input price inflation rose in May on higher raw material prices and shortages, leading to an increase in output prices. Despite worsening sentiment, UK manufacturers were generally positive about production forecasts over the coming year. FocusEconomics Consensus Forecast panelists see fixed investment rising 2.3% in 2018, which is up 0.6 percentage points from last month’s forecast, and 2.0% in 2019. he Central Bank downgraded its growth forecasts in May, and now expects the economy to expand 1.4% in 2018 and 1.7% in 2019. FocusEconomics panelists expect GDP to expand 1.4% in 2018, which is unchanged from last month’s forecast, and 1.5% in 2019.

Housing market continues to lose steam in May

According to the Nationwide Building Society (NBS), house prices in the United Kingdom fell 0.2% in May compared to the previous month in seasonally adjusted terms, contrasting April’s 0.1% increase and marking the third month-on-month price decline so far this year. On an annual basis, house prices rose 2.4% in May, down from April’s 2.6% and coming in below market expectations. The average house price in May was GDP 213,618 (May 2017: GBP 208,711). May’s tepid result comes against a backdrop of sluggish economic growth and pessimistic consumer sentiment. Going forwards, house prices are likely to continue to increase at a mild rate, underpinned by tight supply. In addition, a gradual recovery in real wages could support demand. Monetary conditions will be another key determinant of the evolution of prices. Although the Bank of England kept rates constant at its June meeting, our panelists continue to expect a rate hike this year, which would have a knock-on effect on borrowing costs.

Unemployment

Employment growth remains solid but wage growth is weak The unemployment rate remained at a multi-decade low of 4.2% in the February-April period, where it has been for three consecutive rolling quarters. This was underpinned by ongoing strong employment growth: 146,000 jobs were added compared to the November-January period, once more beating market expectations. However, the rise was mainly a result of greater parttime work, with the total hours worked in the economy declining slightly. Higher employment saw the inactivity rate remain at an all-time low of 21.0%. Despite the tight labor market, the recent recovery in wages appeared to lose some impetus in February-April, with nominal earnings growth excluding bonuses dipping to 2.8% from 2.9% in the prior rolling quarter. Although real earnings continued to rise marginally, average total pay is still below the precrisis peak reached in 2008. The Central Bank expects nominal regular pay growth to continue to hover slightly below 3.0% this year. As inflation gradually declines, this should see a gradual uptick in real wage growth, although it will likely remain sluggish. Public-sector pay—which has been constrained in recent years by austerity measures—is likely pick up as the government gradually lifts its spending straightjacket thanks to an improved fiscal situation. FocusEconomics Consensus Forecast panelists expect unemployment to average 4.3% in 2018, which is down 0.1 percentage points from last month’s forecast, and 4.5% in 2019.

Thank you Focus Economics for the economic reporting. Please visit Focus here. 

Economic growth appears on track to record a stellar performance in Q2, fueled by strong business investment, tax cuts and an ever-tightening labor market boosting consumer spending. In May, the unemployment rate hit a new low, and growth in retail sales accelerated as consumer confidence remained near a historic high. Furthermore, housing starts picked up in the same month, helped by rising wages and lower taxes boosting household incomes. Survey data for May indicates the private sector has so far been unfazed by current tensions with trade partners, although President Trump’s rapidly escalating rhetoric vis-à-vis China in past weeks could prove damaging to business confidence. The month ahead might represent a critical junction, as new restrictions on investments between Chinese and American firms are set to be unveiled on 30 June, while reciprocal tariffs with China and retaliatory measures from Canada will take effect in early July. 

The exceptional domestic momentum has so far been unmarred by signs of moderating growth in key trading partners. Although recent tariff measures will likely have minimal impact, the increasingly likely escalation of the dispute with China into a trade war is a major downside risk, which could weigh on business sentiment and investment. Faster monetary policy tightening and high fiscal deficits should further dampen growth in the medium-term. FocusEconomics panelists see GDP expanding 2.8% in 2018, unchanged from last month’s estimate. 

In 2019, growth is seen moderating to 2.4%. Inflation hit a 5-year high of 2.8% in May, up from 2.5% in April. The 12–13 June FOMC meeting communiqué suggests the Fed is satisfied with the current underlying inflation trend and might tolerate inflation overshooting its target for a limited period. Inflation is likely to remain strong in the near term thanks to buoyant growth, before moderating next year. Our panel sees inflation averaging 2.5% in 2018 and 2.2% in 2019. 

The Federal Reserve raised the federal funds rate by 25 basis points to 1.75%–2.00% at its 12-13 June FOMC meeting. It also raised its median projection from three hikes to four in 2018, meaning two more rate increases are now the baseline scenario for this year. This assessment is shared by our panel, which expects the federal funds rate to end 2018 at 2.44% and 2019 at 3.06%. An increasing interest rate differential coupled with strong economic data pushed the dollar higher against main trading partners’ currencies in June. On 22 June, the dollar index traded at 94.5, a month-on-month strengthening of 1.0%.

Decent read here on how the lack of union membership has allowed for greater wage inequality. My argument is that we are more dealing with a third and fourth industrial revolution, coupled with subsequent labor issues, on a system which greatly rewarded the entrepreneur and capitalistic class. Payroll and wages are - by design - capped at levels. The largest offenders are the largest employers.

 - CH

“The labor market and economy are evolving in a way that’s giving employers increased power over workers,” he said. “Unions were, at least at one point, an important institution for resisting and adding some balance.”

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