JPMorgan Chase Bank NA, New York Economic Research

Robert Mellman United States

May 27, 2011

Real and nominal consumer spending

United States % ch saar, over 3 months
• Real GDP forecast for 2Q11 revised down to 2.5%; 8 Nominal spending
risks to the forecast are still on the low side
6
• Latest data show slowing in real consumer spending
and manufacturing activity
4
• Look for May ISM mfg. to fall to 57.0, auto sales to
slip to 12.1 mn, payroll growth slowing to 175,000 2
Real spending
Most economic reports this past week continued to come in 0
2010 2011
on the weak side of expectations. The forecast for current-
quarter real GDP has been lowered to 2.5% saar (from Household saving rate
3.0%) and there is still modest downside risk to the revised % , sa
forecast. In particular, real consumer spending through
April is tracking below the 2.5% forecast for this quarter, 6.5
and auto industry guidance points to a decline in unit auto
sales in May. Real GDP growth is still expected to reach 6.0
3.0% in both the third and fourth quarters, helped by a
marked decline in inflation associated with more stable oil 5.5
prices and by a rebound in auto sales and production from
2Q11 levels that are being held down by supply constraints 5.0
resulting from the Japan earthquake and tsunami.
4.5
2010 2011
News this past week was generally weak and includes:
Regional manufacturing surveys
• The government’s estimate of 1Q11 real GDP growth was
Sa, simple avg of 4 surveys with May results Employment
unchanged at 1.8%, but the composition of growth now
shows weaker final sales (mainly due to a downward revi- 25
sion to consumer spending) and more inventory accumula- 20
tion. These revisions are a modest negative for near-term Shipments
15
growth. The more important revisions were on the income
side of the ledger, where growth of wage and salary income, 10
growth of disposable income, and estimates of the house- New
5
orders
hold saving rate were all revised noticeably lower for the
0
past two quarters (see the research note “US GDP revision:
key news is in the income accounts, in this GDW). -5
2010 2011

• Real consumer spending rose only 0.1% in both March
and April, and real disposable income was unchanged in
each month. Early in the quarter, real spending is running
well below the 2.5% forecast despite a decline in the sav-
ing rate to a new low for the expansion.
• Durable goods orders followed large gains in March with
sharp declines in April for total orders, non-transportation
orders, and core capital goods orders. And the more timely
Fed regional surveys for May show fairly dramatic slow-
ing. This past week’s reports from the Richmond Fed and
Kansas City Fed were even weaker than the previous
week’s downbeat report from the Philadelphia Fed. Both
of the latest surveys show deep declines into negative ter-
ritory for new orders and shipments. But these surveys do
not show any weakening in employment yet.
• Initial jobless claims for the latest reporting week of May
21 increased 10,000 to 424,000. Initial jobless claims av-
eraged below 400,000 in both February and March but
then rose to 423,000 in April and 425,000 so far in May.
• The latest housing data were mixed. New home sales for
April surprised on the upside with a 7.3% samr gain,
while pending home sales for April surprised on the low
side with an 11.6% decline.

14
JPMorgan Chase Bank NA, New York Economic Research
Robert Mellman Global Data Watch: Developed Markets
May 27, 2011

• The first effects of the recent decline in the price of gaso- New orders for durable goods
line are finally coming through in the sentiment reports. % ch saar, over 3 months
The final Michigan consumer confidence survey was up 40 Core capital goods
4.5pts from the April reading and at its highest level Total ex
30 transportation
since February. One-year inflation expectations fell from
4.6% in April to 4.1% in May.
20

Latest data show manufacturing slowing 10

The main message from the durable goods report for April
is a familiar one—that durable goods orders are choppy
from month to month. Durable goods, however sliced, de-
clined sharply in April but on the heels of much larger in-
creases in March. Some of the April decline in new orders
was due to special factors. New orders for machinery have
a regular intra-quarter pattern (concentrated in the turbines,
generators, and other power transmission equipment com-
ponent) and have declined in the first month of each of the
past 10 quarters. Machinery orders declined 3.4% in April
following a 7.9% increase the month before. Motor vehicle
output was depressed by shortages of parts from Japan and
declined 4.5% in April following a 6.5% increase in March.
New orders for military goods had a weak month and de-
clined 8.9% following a 6.0% increase the month before.
In light of the volatility, any view on orders should average
growth rates over three months. Both total orders and or-
ders ex. transportation industries have slowed to a standstill
over the three months through April. This is broadly in line
with the convincing and broad-based slowing in factory IP.
However, capital goods activity usually lags swings in the
rest of the economy. And the trend in core capital goods
orders has accelerated to growth of 10.6% saar over the
past three months; the trend in core capital goods shipments
has also accelerated to 7.5% growth. Note that business
spending on motor vehicles (which are not included in core
capital goods) are likely to decline this quarter. So equip-
ment spending in 2Q11 will probably rise less than might
be expected based on core capital goods shipments alone.
The more up-to-date information on manufacturing comes
from the May regional surveys. As noted, these surveys
generally show very sharp declines in shipments and new
orders in May.
Inflation and core inflation up in April
The April PCE price figures echoed the readings of the CPI
and showed that both headline and core inflation continued
to accelerate. The PCE price index increased 0.33% in
April and held its peak 3-month run rate for the cycle of
4.6% saar. The core PCE price index rose 0.18% in April
and hit a new peak 3-month run rate of 1.9% saar. The
0
-10
2010 2011
PCE price index and core PCE price index
% ch saar, 3m/3m, both scales
PCE price index
6 3.0
3 2.5
2.0
0
1.5
-3 Core PCE prices
1.0
-6 0.5
-9 0.0
2006 2007 2008 2009 2010 2011
price of gasoline has started to decline over the past few
weeks, and the PCE price index is likely to rise only 0.1%
in May and average less than 2% in the second half. Over
the past several years, any moderation in headline inflation
has been associated with a substantial near-term slowing in
core inflation as well (second chart). Thus, the forecast
looks for core inflation to recede to about 1% saar in the
second half.
May data expected to turn weaker
The upcoming round of May economic reports will be im-
portant in conditioning views on economic performance.
The ISM manufacturing survey (Wednesday) has been run-
ning high relative to manufacturing IP and other measures of
industrial activity, and it is forecast to decline 3.4pts to 57.0.
Based on industry guidance, May new car and light truck
sales (Wednesday) are forecast to decline to a pace of 12.1
million from 13.1 million in April, only partly due to supply
availability problems. The ISM nonmanufacturing survey
(Friday) plunged in April in a move that looks overdone.
The forecast looks for a 1.2pt increase in May to 54.0. Fi-
nally, payroll employment growth in May is forecast to slow
to 175,000 from a gain of 244,000 in March, and the unem-
ployment rate is forecast to edge down 0.1%-pt to 8.9%.

15
JPMorgan Chase Bank, New York Economic Research
Michael Feroli United States
May 27, 2011
Daniel Silver

Data releases and forecasts Over the last year, ADP has missed the first print of
private employment in the BLS survey by an average of
Week of May 30 - June 3 84,000. If, over the same period, one had constructed a
naive forecast of the first print of BLS private employ-
Tue S&P/Case-Shiller home price index ment as simply the average of the two previous BLS
May 31 %oya, unless noted prints, the average forecast error would have been
9:00am Dec Jan Feb Mar 49,000.
20-city composite -2.4 -3.1 -3.3 -3.1
Wed ISM manufacturing survey
%m/m sa -0.4 -0.3 -0.2 -0.2
Jun 1 Sa
10-city composite -1.4 -2.2 -2.6
10:00am Feb Mar Apr May

Overall index 61.4 61.2 60.4 57.0

2Q10 3Q10 4Q10 1Q11
Production 66.3 69.0 63.8
National composite 3.8 -1.4 -4.1 -4.1
New orders 68.0 63.3 61.7
March home price measures that have already been re- Inventories 48.8 47.4 53.6
leased, including the FHFA and the LoanPerfomance Employment 64.5 63.0 62.7
index, have generally shown ongoing price declines Supplier deliveries 59.4 63.1 60.2
though at a less rapid pace than in prior months. In recent Export orders 62.5 56.0 62.0
months, declines in the Case-Shiller have been less se- Imports 55.0 56.5 55.5
vere than for other indices, particularly the FHFA, which Prices 82.0 85.0 85.5
had shown some pretty steep drops. This may have partly
There are three reasons to look for a decent move down
been a function of the fact that the Case-Shiller index
in the May ISM manufacturing survey: first, the internal
weights areas by housing values, whereas FHFA weights
dynamics of the survey, in particular the gap between
them by housing units, and high-priced areas have gener-
the new orders and inventories indices, are suggesting
ally been experiencing better housing market outcomes.
the current level of the composite is too high; second,
We don’t expect to see the improvement in the March
the composite also looks too high relative to either in-
Case-Shiller that was exhibited by the other housing indi-
dustrial production or the regional manufacturing sur-
ces, in part because we think the newly developed sea-
veys; and third, those regional manufacturing surveys
sonal pattern may restrain home price values, as the sea-
that have already been reported for May fell further.
sonal factors may not capture the unusually large share
While the Empire State came off somewhat modestly,
of distressed sales that occurred in March.
the Philly, Richmond, and Kansas City Fed surveys all
tumbled appreciably in May. The one reason not to look
Tue Consumer confidence
for a big decline in the May ISM is the natural sticki-
May 31 Sa
ness of the series: big declines are rare, particularly as
10:00am Feb Mar Apr May
the survey has become more stable in recent decades.
Conference Bd index 72.0 63.8 65.4 65.0 Even so, we don’t think our projected 3.4pt drop would
Present situation 33.8 37.5 39.6 be outside the range of reasonable outcomes: over the
Jobs plentiful 4.9 4.6 5.2 past 20 years the ISM has fallen this much or more on
Jobs hard to get 44.4 44.4 41.8 11 occasions.
Plentiful less hard to get -39.5 -39.8 -36.6
Expectations 97.5 81.3 82.6 Wed Construction spending
Jun 1 %m/m sa
The Conference Board’s measure of consumer confi-
10:00am Jan Feb Mar Apr
dence firmed a little in April to 65.4 after taking a big
spill in March. Since that time, some sentiment mea-
Nominal -1.0 -2.4 1.4 0.2
sures have stabilized further or even improved, in part
Private -1.4 -2.9 2.2 0.1
because gasoline prices have come off their peak. Rela-
Residential 4.6 -6.8 2.6 0.0
tive to other gauges of consumer attitudes, the con-
Nonresidential -6.8 1.0 1.8 0.1
sumer confidence measure puts a little more weight on
Public -0.3 -1.4 0.1 0.3
labor market conditions. For this reason we don’t ex-
pect consumer confidence to follow other indicators Construction has had a pretty tough run over the past few
higher, as jobless claims suggest that the labor market months, with the ongoing weakness in this sector prob-
may have softened a little in May. ably exaggerated by unusually severe winter weather.
The return of more normal conditions in April should
Wed ADP employment help construction spending improve some relative to prior
Jun 1 Change from month ago, sa months. We look for modest increases in public and pri-
8:15am Feb Mar Apr May vate nonresidential construction outlays. On the residen-
tial side, the housing starts data indicate that single-fam-
ADP 205 207 179 ily new home building likely slumped last month. Partly
BLS private payroll 261 231 268 offsetting this, we look for continued improvement in the
home improvements category and a little bit better per-
formance in the multi-family housing segment.

16
JPMorgan Chase Bank, New York Economic Research
Michael Feroli Global Data Watch: Developed Markets
May 27, 2011
Daniel Silver

Wed Motor vehicle sales Initial jobless claims

Jun 1 Mn saar 000s, sa
Feb Mar Apr May
700
Light trucks and autos 13.4 13.1 13.1 12.1
Imports 3.2 3.1 2.9 600
Domestics 10.2 9.9 10.2
Autos 4.7 4.9 4.8 500
Light trucks 5.5 5.1 5.4
400
We expect that light vehicle sales stepped down in May
to a 12.1 million annualized pace after April’s 13.1 mil- 300
lion sales rate. Inventory shortages related to the Japa-
nese earthquake are likely to have played only a modest 200
role in the decline in sales. Instead, industry guidance 2007 2008 2009 2010 2011
suggests much of the apparent weakness owes to a com-
bination of higher gasoline prices and higher vehicle Thu Productivity and costs
prices. Jun 2 Nonfarm business sector, %q/q saar, unless noted
8:30am Rev Prel Rev
Thu Jobless claims 4Q10 4Q10 1Q11 1Q11
Jun 2 000s, sa
8:30am New claims (wr.) Continuing claims Insured Productivity 2.9 2.9 1.6 1.8
Wkly 4-wk avg Wkly 4-wk avg Jobless,% %oya 2.0 2.0 1.3 1.3
Output 4.4 4.4 3.1 3.2
Mar 19 394 391 3732 3770 3.0 %oya 3.7 3.7 3.2 3.2
Mar 26 392 395 3738 3750 3.0 Hourly compensation 1.9 0.3 2.6 2.3
Apr 2 385 390 3703 3735 2.9 %oya 1.8 1.4 2.5 2.0
Apr 9 416 397 3708 3720 3.0 Unit labor costs -1.0 -2.5 1.0 0.5
Apr 16¹ 404 399 3659 3702 2.9 %oya -0.2 -0.6 1.2 0.7
Apr 23 431 409 3751 3705 3.0 Hours 1.5 1.5 1.4 1.4
Apr 30 478 432 3792 3728 3.0 %oya 1.7 1.7 1.9 1.9
May 7 438 438 3736 3735 3.0 A substantial downward revision to labor compensation
May 14¹ 414 440 3690 3742 2.9 in the fourth quarter of last year, and to a lesser extent
May 21 424 439
in the first quarter of this year, should lower the profile
May 28 420 424
for compensation per hour and unit labor costs, taking
1. Payroll survey week
the 1Q year-ago print on unit labor cost growth from
1.2% to 0.7%, by our estimates. A modest upward revi-
The claims data have been a disappointment. After sion to business output growth should bump up produc-
moving down briskly in the first quarter, jobless claims tivity growth 0.2%-pt in 1Q to 1.8%.
have ground higher over the last two months and stood
at 424,000 in the week ending May 21. We look for Thu Factory goods report
some improvement in the upcoming release, as some, Jun 2 %m/m sa,unless noted
though certainly not all, of the recent move higher 10:00am Jan Feb Mar Apr
could reflect some transitory factors such as automaker
shutdowns and storm-related claims that should fade New orders 3.4 -0.3 3.4 -1.2
over time. However, we suspect there may be more Shipments 1.8 0.2 2.7 0.0
state and local government furlough days around the Inventories 1.4 1.2 1.2 1.1
Memorial Day holiday than usual, which could prevent Inventory/sales ratio 1.31 1.32 1.30 1.32
claims from falling further. In the most recent weekly The April durables report indicated a sizable 3.6% drop
claims data the Labor Department did not note any un- in orders for that segment of factory output. Our models
usual factors that may have elevated claims. For this look for a 0.8% increase in orders and shipments from
reason we would be surprised to see a speedy move factories in the nondurable segment, where the anticipa-
back under 400,000. tion of growth is mostly predicated on higher commod-
ity prices lifting the nominal value of output. We
project nondurable inventories will increase 1.3%,
which along with the 0.9% increase in durable invento-
ries implies a 1.1% increase in nominal inventories in
the factory sector, a modest deceleration from the pace
in recent months.

17
JPMorgan Chase Bank, New York Economic Research
Michael Feroli United States
May 27, 2011
Daniel Silver

Fri Labor market report Even if there was a modest net incremental boost in
Jun 3 Sa hiring this year, it is not clear that it will all show up in
8:30am Feb Mar Apr May May, as some of the hiring was for students who will
Payroll employment begin working—and therefore be counted as employed
(ch, m/m, 000s) 235 221 244 175 by the BLS standards—after the May payroll survey
Private payrolls 261 231 268 190 week. So we would not be surprised by a modest
Goods-producing 81 37 44 5 pickup in food service employment in May but don’t
Construction 39 2 5 -5 think this will be a major story for the overall report.
Manufacturing 37 22 29 5 The average workweek has been unchanged at 34.3
Service-providing 154 184 200 160 hours for the last three months and we look for another
Private service-providing 180 194 224 175 unchanged number in the May report. The workweek of
Wholesale trade 16 16 7 both goods- and service-providing industries increased
Retail trade 0 -3 57 in April, suggesting that the rounding is close to a 34.4
Professional services 38 86 51 print, but with a slowdown in manufacturing in the off-
Temporary help 11 34 -2 ing, one of the usual margins of adjustment in that in-
Education/health 43 33 49 dustry is the workweek. So we expect that to offset any
Leisure and hospitality 54 51 46 tendency for the workweek to rise in the May report.
Government -26 -10 -24 -15 Our models look for an increase in average hourly earn-
Average weekly hours 34.3 34.3 34.3 34.3 ings of 0.1%, which is fairly close to the soft pace that
Index, hrs worked (%m/m) 0.5 0.2 0.3 0.2 this has been running on average over the past year.
Hourly earnings (%m/m) 0.1 0.2 0.1 0.1
(%oya) 1.8 2.0 1.9 1.8 The participation rate has stood at 64.2% since January.
Unemployment rate (%) 8.9 8.8 9.0 8.9 If it is unchanged once again in May, and if household
survey employment increases in line with establishment
The February through April period witnessed the long- survey employment, then unemployment would move
awaited pickup in private hiring, with employment in down from a low-side 9.0% in April (8.96%) to a high-
the private sector increasing 253,000 per month on av- side 8.9% in May (8.92%). That’s not to say we have
erage during that period. We anticipate a deceleration in any confidence that either of the two above-mentioned
May, as jobless claims have signaled a loss of momen- conditions will hold, but in the absence of a more con-
tum in the labor market. Moreover, a number of busi- vincing counterargument, 8.9% seems a reasonable
ness surveys suggest that employers have turned a little forecast for the May unemployment rate.
more cautious about the outlook. At a more detailed
level, three industries put in performances in April that Fri ISM nonmanufacturing survey
we think are unlikely to be repeated in May. Manufac- Jun 3 Sa
turing employment has increased by almost 30,000 on 10:00am Feb Mar Apr May
average over the past three months. Given the well-
advertised slowing in industrial activity, hiring in this Nonmfg. index (NMI) 59.7 57.2 52.8 54.0
area seems primed for a slowdown. Second, retail em- Business activity 66.9 59.7 53.7
ployment increased a blistering 57,000 last month, per- New orders 64.4 64.1 52.7
haps in part due to seasonal adjustment difficulties re- Employment 55.6 53.7 51.9
garding the Easter holiday. Regardless of reason, this Prices 73.3 72.1 70.1
pace of hiring—a decade high—is unlikely to be re- The drop in the April nonmanufacturing ISM was one
peated. Finally, health care added 42,000 jobs last of the more concerning reports in the recent rash of
month. While this sector is always a strong performer in weak data: in spite of having a lower profile than its
terms of job growth, we expect something closer to its manufacturing comrade, the nonmanufacturing ISM
25,000 average pace of job gains this month. actually correlates better with GDP, both leading and
Outside of the private sector, we look for the govern- contemporaneously. April data have generally been
ment to have shed 15,000 jobs last month, about the disappointing, partly confirming the early message the
average over the past few months. We anticipate this nonmanufacturing ISM sent. For May, we anticipate a
part of the employment report will deteriorate in the modest rebound, as the April decline still looked exces-
late summer as states enter their new fiscal year and sive against the overall macroeconomic backdrop. Last
implement more job cuts. month’s decline could have also been somewhat exag-
One upside that has been mentioned, but that we don’t gerated by what looked like fairly aggressive seasonal
think will have a material impact, is the national hiring factors. Even applying average seasonal factors for
day conducted by McDonald’s on April 17. That hiring April, the series still experienced a quite substantial
occurred after the April payroll survey week, so in prin- decline, so we wouldn’t rely too heavily on this argu-
ciple should impact the May count of jobs. Two factors ment to look for a rapid snap back in this series.
suggest this will be a minor impact. The first, and most
important, factor is that McDonald’s normally season-
ally ramps up hiring in the spring. Usually that hiring is
“around 50,000,” which is somewhat less than the
62,500 taken on board during the national hiring day.

18
JPMorgan Chase Bank, New York Economic Research
Michael Feroli Global Data Watch: Developed Markets
May 27, 2011
Daniel Silver

Review of past week’s data The above-mentioned seasonality in the core capital goods
numbers—both orders and shipments—is entirely within the
New home sales (May 24) machinery sector, more specifically within the category “tur-
bines, generators and other power transmission equipment.”
Feb Mar Apr It remains a mystery why the Census Bureau has not ad-
Total (000s, saar) 270 278 300 301 305 323
equately seasonally adjusted this series. In the advance
%m/m -13.5 -10.3 11.1 8.3 1.7 7.3
durables report this level of detail is not reported, and so we
%oya nsa -22.2 -18.5 -19.4 -22.2 -26.3 -22.0
can only subtract the large machinery category to get at a
Months’ supply 8.2 7.9 7.3 7.2 6.5
series that is not seasonally polluted. Orders in this ex.-ma-
Median price (%oya) -6.4 -1.8 -4.9 -4.6 4.6
chinery core capital goods category fell 1.8% in April after a
3.2% increase in March. The less volatile shipments number
New home sales picked up to an annual pace of 323,000 in increased 0.4% last month after a 1.7% increase in March—
April, a 7% increase over March and the best reading since decent or mixed results, but certainly not terrible. Another
December. New home sales probably were boosted by buy- approach is to take the three-month annualized growth rate,
ers attempting to purchase before the April 18 expiration of which eliminates all variance in a series due to harmonics at
more generous terms on FHA mortgage insurance premiums. a quarterly frequency. This series is up 10.6% for orders and
After that date, effective mortgage rates for FHA borrowers 7.5% for shipments, both figures below the surging numbers
rose by 1/4-1/2%-pt. The mortgage purchase application registered last year but still a little stronger than the long-run
data, which increased in the lead-up to the April 18 deadline, trend for equipment spending.
have since eased, indicating some demand may have been FHFA home price indexes (May 25)
pulled forward. Given the timing of how existing home sales Purchase only
are recorded, we could see some FHA-related increase in Jan Feb Mar
May existing home sales as well. All four regions of the
country participated in last month’s increase in new home %oya -4.8 -5.8 -5.5 -5.8
sales. Inventories of unsold new homes fell another 5,000 to %m/m sa -1.0 -1.2 -1.6 -1.5 -0.5 -0.3
175,000.
3Q10 4Q10 1Q11
Durable goods (May 25)
%m/m sa All transactions (%q/q) 1.1 0.9 -0.8 -0.8 -3.1 -2.7
Feb Mar Apr %oya -0.9 -1.3 -1.3 -1.6 -3.0 -3.1
Purchase-only (%q/q sa) -1.8 -1.5 -0.8 -1.4 -3.0 -2.5
New orders 0.8 -1.1 2.9 4.4 -1.7 -3.6 %oya -3.3 -2.9 -4.0 -4.2 -5.2 -5.6
Ex transportation 0.8 -0.6 1.8 2.5 -0.6 -1.5
Nondef cap. gds ex air 0.9 -0.1 4.1 5.4 -2.2 -2.6 Gross domestic product (May 26)
Shipments 0.6 0.0 2.1 3.1 -1.0 %ch, q/q saar, unless noted
Nondef cap. gds ex air 0.5 -0.2 2.3 3.7 -1.4 -1.7 Adv Second
Inventories 1.3 1.2 1.4 1.7 0.9 4Q10 1Q11 1Q11
Real GDP 3.1 1.7 2.3 1.8
The worsening seasonality in the durable goods report
Final sales 6.7 0.8 1.2 0.6
makes it increasingly difficult to extract a reliable signal on
Domestic final sales 3.2 0.9 1.2 0.7
the health of the economy, but as best we can gather the
Consumption 4.0 2.7 3.0 2.2
April durables report was okay—not particularly boomy, but
Equip. and software 7.7 11.6 11.3 11.6
not falling apart either. New orders fell 3.6% last month,
Nonres. structures 7.7 -21.8 -17.6 -16.8
pulled down by the expected declines in aircraft and vehicle
Residential investment 3.3 -4.1 -3.5 -3.3
orders. Outside of transportation, orders dropped 1.6%. Or-
Government -1.7 -5.2 -5.1
ders for core (nondefense, ex. aircraft) capital goods de-
Net exports (pct.pt.contr.) 3.3 -0.1 0.0 -0.1
clined 2.6% after an upward-revised increase of 5.4% in
Inventories (pct.pt.contr.) -3.4 0.9 1.1 1.2
March. In principle this could signal a loss of momentum in
Core PCE price index 0.4 1.5 1.4
capital spending intentions by businesses. However, this
(%oya) 0.8 0.9 0.9
series has significant intra-quarterly seasonality and has de-
GDP chain price index 0.4 1.9 1.9
clined in the first month of the quarter in each of the last 10
(%oya) 1.3 1.6 1.6
quarters—and many of those quarters turned out favorable
Adj. corporate profits 2.3 2.0 1.3
for capital spending. We think that after attempting to con-
(%oya) 18.3 9.3 8.5
trol for this noise, the trend in capital spending is still de-
cent, and is probably tracking close to or a little below our
projection for an 8% annualized gain in real capital equip- The second print of 1Q real GDP growth shows the economy
ment spending in 2Q. Outside of the information on capital expanding at a paltry 1.8% annual rate, the same as in the
equipment spending, the other interesting development to first print. Expectations for an upward revision were con-
note relates to durable inventories. The deceleration in in- founded by a weaker-than-expected print on consumer
ventory building in April is consistent with our downward spending. In spite of the downward revision to consumer
revision to 2Q GDP to 2.5%, in which we see inventories spending, the saving rate in 1Q was also revised lower, from
subtracting from growth this quarter. 5.7% to 5.1%, as income was revised down even more than

19
JPMorgan Chase Bank, New York Economic Research
Michael Feroli United States
May 27, 2011
Daniel Silver

spending. Much of the downward revision occurred in the der to make it through this challenging environment: since
fourth quarter, where nominal compensation growth was the beginning of the year the personal saving rate has fallen
revised down from a 3.2% annual rate to a 1.9% pace. Simi- from 5.4% in January to 4.9% in April, which accounts for
larly, real disposable income growth in 4Q and 1Q was re- almost all of the spending growth realized in that period. Just
vised down to 1.1% and 0.8%, from what had been reported as consumers used saving to smooth through the energy price
as 1.9% and 2.9%. A big part of the downward revision to spike on the upside, any move to rebuild saving in the wake
consumption was less energy use, while the downward revi- of easing gasoline prices could soften the lift to what other-
sion to income was due to more comprehensive wage and wise should be a very stimulative development.
salary data. Since the expansion began, the arrival of the
comprehensive wage and salary data has usually led to The best news in the personal income and outlays report, for
downward revisions to compensation growth. those worried about an early removal of accommodative
monetary policy, was the somewhat softer-than-anticipated
The composition of growth looks a little less friendly for the increase in the core PCE measure, which rose a low-side
second quarter, as real inventories increased at a $52.2 billion 0.2% (0.185%) in April. There were some modest downward
annual rate, about $9 billion more than in the first print, and revisions to previous months’ core PCE, and the year-ago
inventories now account for 1.2%-pts of 1Q growth, up from figure is up 1.0%.
0.9%-pt in the first print. Revisions to the other categories of
investment, as well as to government spending and net ex-
ports, were relatively minor. The first look at first-quarter Pending home sales (May 27)
NIPA-based corporate profits was also released. The profit Sa, unless noted
picture was mixed: adjusted pre-tax profits increased 1.3%, Feb Mar Apr
the slowest increase so far in this expansion, though the levels Total (mn, ar) 89.5 94.1 92.6 92.2 81.9
of profits and of profit margins remain quite elevated. More- %ch m/m 0.7 5.1 3.5 -2.0 -11.6
over, in the domestic nonfinancial sector—where profits are %oya (nsa) -10.6 -11.5 -12.9 -17.3 -26.8
arguably better-measured than in the financial sector—profits
rose 5.2%. Profits from the rest of the world increased a rapid It appears the housing market is still in the doldrums, as
12.6%. April’s pending home sales report came in well below expec-
tations, nose-diving 11.6%. Its not unprecedented to see
Personal income (May 27)
double-digit declines in this series—for example, the index
%m/m sa, unless noted
declined nearly 30% last May—though such tumbles usually
Feb Mar Apr
happen after identifiable events, such as the expiration of a
housing subsidy. April’s plunge, in contrast, seemed to come
Personal income 0.4 0.5 0.4 0.5 0.4
out of the blue. Neither mortgage applications nor new home
Wages & salaries 0.4 0.3 0.5 0.4
sales in April hinted at such a fall. The biggest decline oc-
Consumption 0.9 0.8 0.6 0.5 0.5 0.4
curred in the South, down 17%, though sizable declines took
Real consumption 0.5 0.4 0.2 0.1 0.1
place in the Midwest and West, down 10% and 9%, respec-
PCE price index 0.4 0.4 0.4 0.3
tively; the North eked out a small gain.
Core 0.17 0.16 0.13 0.12 0.23 0.18
Mkt-based core 0.2 0.1 0.2
Core (%oya) 0.9 0.9 1.1 1.0
Consumer sentiment (May 27)
Mkt-based core (%oya) 1.0 1.0 1.1
Pre Fin
Saving rate 5.5 5.0 5.5 4.9 5.5 4.9
Apr May May
Real consumer spending barely advanced in April and revi- Univ. of Mich. Index (nsa) 69.8 72.4 71.5 74.3
sions to prior months show a very weak trajectory for out- Current conditions 82.5 80.2 81.9
lays heading into the current quarter. Early indications sug- Expectations 61.6 67.4 69.5
gest May spending could come in soft as well, which would Inflation expectations
imply annual growth in real consumer spending this quarter Short term 4.6 4.4 4.1
in the mid-ones. This lends downside risk to our below-con- Long term 2.9 3.0 3.0
sensus call for 2.5% GDP growth in 2Q, so much so that it Homebuying conditions 146.0 152.0 149.0
would be a favorable outcome if the economy can even
maintain a two-handle on 2Q growth. We will revisit our call The Michigan survey of consumer sentiment improved fur-
after May’s auto sales number is released on June 1. ther in the final report, coming in at 74.3, up from 72.4 in the
preliminary number and 69.8 in the final April report. Pre-
Not only were the real outlays numbers soft, but the income sumably the easing in gasoline prices has contributed to the
numbers were even softer: real disposable personal income firming in sentiment, which is now back to the level at which
was unchanged in April and has been unchanged over the it began the year. The same easing in gasoline prices may
past four months, a period in which income was boosted by have also contributed to inflation expectations continuing to
the $110 billion lift to incomes from the onetime reduction fall: one-year-ahead inflation expectations were at 4.1%,
in Social Security withholding taxes. Real income has been down from April’s 4.6%, and five-year-ahead expectations
depressed by rising inflation, and the PCE price deflator in- settled in at a comfortable 2.9%, down from the recent peak
creased another 0.3% in April after advancing 0.4% in in March when longer-term inflation expectations had moved
March. As increases in energy prices subside, this drag up to 3.2%.
should be lifted. Consumers have dipped into savings in or-

20
JPMorgan Chase Bank NA, New York Economic Research
Robert Mellman Global Data Watch: Developed Markets
May 27, 2011

Real consumer spending

Focus: consumer spending % ch saar
• Real consumer spending has slowed to a 2.1% saar 5
growth pace in the three months through April from
4
4.0% in the fourth quarter of last year as higher fuel
prices have squeezed real incomes. 3 Over year ago

• The slowing has been especially marked for items most 2

Over 3 months
directly affected by higher fuel prices, including spending
1
on gasoline, motor vehicles, and transportation services.
0
2010 2011
• Real consumer spending on durable goods has slowed
but is still up 5.4% saar over the past three months. Auto
sales have stalled, but spending on nonauto durables has
increased at a 7.9% pace in the last three months. Real consumer spending on durable goods
% ch saar over 3 months, both scales
• Real consumer spending on nondurable goods has 24 All durables Durables ex autos 60
slowed to a 1.0% pace over the past three months. Real
spending on gasoline has been declining since last fall 16 40
and is down 4.2% saar over the past three months. Real
spending on food is up but only 0.7% saar over the past 8 20
three months.
0 0
• Real spending on services has been fairly stable and is up Autos and parts
at a 2.0% pace over the past three months. Spending on -8 -20
transportation services has been declining over most of 2010 2011
the past six months and has been essentially flat over the
last three months. Real spending on health services has Real consumer spending on nondurable goods
also slowed recently, to a 1.7% growth pace over the past % ch saar, over 3 months All nondurable
three months. goods
12

• Real consumer spending on home electronics and com-

6
puters has continued to increase at a relatively rapid pace
through April, 13.1% saar. Nominal spending on this cat-
0
egory of goods has also continued to increase much
faster than overall consumer spending and is up at a
-6
7.8% annual rate. Food Gasoline

-12
2010 2011

Real consumer spending on home electronics and apparel Real consumer spending on services
% ch saar over 3 months % ch saar over 3 months
30 Electronics including video, audio, 10 Transportation
photo, and computers services Health services
20
5
10

0
0
Clothing and footwear All services
-10 -5
2010 2011 2010 2011

21