Fed Watch

The Federal Open Market Committee voted at today’s monetary policy meeting to increase the Fed Funds target rate from a range of 0.75%-1.00% to 1.00%-1.25%. There was one dissenting voter, Neel Kashkari, who favored leaving rates unchanged.

Some FOMC members revised their economic forecasts from March, but the median projected long-run Federal Funds rate was unchanged at 3.0%.

In recent years the Fed has typically overestimated economic growth and price inflation in its forecasts.

Financial conditions remain loose and are not a present deterrent to the Fed’s targeted policy path.

The M2 money supply remains fairly stable with year over year growth around 6.0%.

The Fed has stated that it intends to begin implementing a balance sheet normalization program later this year, an effort to reduce it’s current holdings of approximately $4.5 trillion.

The FOMC will make its next policy announcement on July 26, 2017.

U.S. Inflation Monitor

Consumer price inflation in the U.S. slowed to 1.9% year over year in May. The Core CPI, which excludes Food and Energy components, has increased only 1.7% from a year ago. Food prices are up 0.9% year over year while Energy prices have risen 5.4%.

Median CPI, which measures the median price change of all the items in the total index, has increased 2.3% year over year, quite a bit faster rate than the Core CPI. The Trimmed Mean CPI, which excludes the highest and lowest 8% of items in the basket, has risen 1.9%.

Core Services prices have tended to outpace growth in the Core CPI while Core Goods prices have typically lagged.

U.S. Treasury Monitor

The U.S. federal government ran a fiscal deficit of $88 billion during the month of May on receipts of $240 billion and outlays of $329 billion. There is generally a fiscal deficit during the month of May, but this is a greater deficit than last year. Fiscal year-to-date, the deficit is approximately inline with last year.

Rolling annual U.S. Treasury receipts have increased only 0.4% year over year, a level somewhat unusual to see during an economic expansion. Individual income taxes, corporate income taxes, and other receipts are all down from a year ago.

U.S. Bank Credit Monitor

Total U.S. commercial bank balance sheets have increased to ~$16.2 trillion through May, an increase of 2.3% year over year. Bank credit, which includes securities and loans & leases, has increased 4.3%.

The 25 largest banks hold $9.3 trillion, or 57.4%, of those assets.

Loans & leases are up 3.9% year over year but growth is slowing, dragged down by falling home equity lines of credit and fed funds & reverse repos with nonbanks.

U.S. Consumer Credit Monitor

Total U.S. consumer credit outstanding through April has increased to ~$3.76 trillion and is up about 6.2% year over year (3-month moving average). Revolving credit, which is mainly comprised of credit cards, is ~$0.96 trillion and up 6.3% from a year ago, while nonrevolving credit, which is installment credit such as student and auto loans, is ~$2.80 trillion and up 6.2%.

Federal government’s share of consumer credit holdings is now up to 28.8%.

U.S. Auto Report

Light vehicle sales in the U.S. slowed in May to an annualized rate of 16.58 million from 16.82 million in April. While now well down from the cycle high of 18.32 million in December, the current sales rate of around 16.6 million is still relatively strong by historical standards. Sales figures shown below are 3-month moving averages.

U.S. International Trade Monitor

Data through April suggest that U.S. international trade growth continues to accelerate. The 3-month moving average of total exports were up 5.8% year over year while imports grew 7.3%.

An annualized services trade surplus of $0.25 trillion and a goods trade deficit of $0.80 trillion net to a total trade deficit of $0.55 trillion.

The petroleum trade deficit has narrowed substantially since 2011, while the trade balance excluding petroleum is near record lows.

Shown below are the major categories of goods and services and their historical levels of imports and exports.

U.S. Construction Activity

Total U.S. construction spending in April was about 2% higher than at pre-crisis peak level in 2006. Nonresidential spending is nearing its 2008 high while residential spending remains well below its 2006 high.

Dividing the categories into public and private sector construction spending illuminates which areas are most reliant on government funding.

U.S. House Prices

House prices in the U.S. continue steadily rising, with the S&P Case-Shiller index up 5.8% year over year in March. The FHFA’s index, which is derived from transactions involving conforming conventional mortgages purchased or securitized by Fannie Mae or Freddie Mac, has increased 6.3%.

Sales prices of previously lived in homes reflect a similar trend, while new home sales prices are often too volatile to offer a reliable signal.

All 20 of the major U.S. cities tracked by the Case-Shiller index have experienced year over year gains in house prices. The total National index is now 2.4% higher than it’s pre-crisis peak while the 20-City Composite index has not yet fully recovered.

Looking at each city individually, we can see where housing excess was most prevalent leading up to the financial crisis.

While all 20 cities tracked in the Case-Shiller index have seen gains, prices in New York City are up only 4.1% from a year ago.

The FHFA tracks house prices by region rather than city and offers an alternative perspective. Their index shows house prices having increased the most year over year in the Pacific region.

The Pacific experienced pre-crisis housing growth unlike any other region.

U.S. GDP Watch

The BEA’s second estimate of U.S. real GDP growth in the first quarter was 1.2% annualized, an increase from the initial estimate of 0.7%. Investment was the largest contributor to growth accounting for 0.8% while government was a drag of -0.2%.

Total real GDP in Q1 was 2.0% higher than Q1 of last year. It is now up 12.5% from it’s pre-crisis peak and 17.5% from post-crisis low.

The bulk of economic growth during the recovery is attributable to the consumption component of GDP.

However, Q1 was the slowest quarter of growth for consumption since Q4 2009.

While consumption has carried the economy, investment has only recently surpassed it’s pre-crisis peak. Net trade and government have not yet recovered to their pre-cris peak levels.

Total nominal GDP has increased 4.08% from a year ago, but once dividing by the GDP price deflator of 2.00%, real GDP has increased by just 2.04%.

Economic growth has historically been consumption driven and remains so.

Consumption has grown to account for more than two-thirds of the economy.