Tuesday 30 May 2017

What's holding US Core PCE back?

The Fed's target for core PCE is 2% and the YoY number has dropped back to 1.5% from 1.8% a few months ago.

Looking at the components the main weakness is durable goods, without which we would likely be over 2% already.

Within this autos, household goods, food and recreational goods were the only weak areas YoY for Q1-17/Q1-16. Services expenditure, which is about 2/3rds of overall spending, is over 2% in all sections except Healthcare.

You could conclude that the dip in Core PCE has been at least in part explained by 'going out of business' sales in retail, price weakness in autos and a drop in food prices.

On the manufacturing side of the economy, which is ultimately producing these goods, looking at the Durable Goods orders/ shipments numbers from the Census Bureau, out of the bigger categories we have had weakness in Autos, Capital Goods and Machinery.

This is consistent with some weakness in Autos and Auto price pressures, and generally slow capex, with the oil sector and its supply chain not having fully recovered from the oil downturn and export related industries being affected by the strong USD/ weak EM demand.

That said, at least in April's seasonally adjusted numbers you saw growth in Autos and some continuing sideways/ moderately weak machinery and capital goods numbers.

On the manufacturing side, on say a 12-18 month view, a new credit cycle in EM boosting imports, Trump's policies pushing the US Dollar down and supporting investment and manufacturing would likely support an increase in manufacturing durable goods prices.

Some pick up in wage growth would also help support the overall Core PCE number, particularly in the services components, along with the ending of liquidation sales in traditional retail and an apparent inventory adjustment in Autos.

On a shorter term basis however, we could see a further dip in a range of data points and potentially even a growth scare going into the summer, with many US macro numbers surprising on the downside recently and the US Treasury bond market showing no signs of fearing inflation and Fed hikes. In fact forward inflation expectations have only really been lower in this cycle during the aftermath of QE ending.


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