Global Economic Highlights: More Signs a U.S. Recovery Has Begun, But Uncertainties Are Huge; Mexico Cuts Policy Rate, with More to Come
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New home sales jumped 16.6 percent in May from April, though April’s level was revised down 5.2 percent, while existing home sales fell 9.7 percent in May after a 17.8 percent drop in April. The pandemic held back existing home sales in May, but on the whole the housing market is holding up better than other sectors of the U.S. economy, and still looks set to lead the recovery.
Consumer spending rebounded 8.2 percent in May, but was still down 19.6 percent from February after March and April’s declines; May’s increase and March and April’s decreases were all the largest on record. In May, spending on durable goods jumped 28.6 percent, while spending on nondurable goods increased 7.7 percent and spending on services 5.4 percent. From a year earlier, durable goods spending actually increased in May, up 2.4 percent, while nondurable goods spending was barely lower, down 0.6 percent. The drag was services spending, down 14.3 percent in the same terms.
Personal income fell 4.2 percent in May as the pace of stimulus payments slowed, partially offset by the beginning of a recovery in wages and salaries, up 2.7 percent on the month but still down 8.6 percent from February, and proprietors’ incomes, up 2.8 percent from April but still down 17.4 percent from February. With stimulus payments offsetting income losses from other sources, personal income was up 7.0 percent from a year earlier in May. With spending higher on the month and incomes lower, the personal saving rate dipped to 23.2 percent in May from 32.2 percent in April, but was still considerably higher than the pre-crisis record of 17.3 percent set in May 1975.
Both the overall and core price indices for personal consumption expenditures—the Fed’s preferred measure of inflation—rose 0.1 percent in May from April, with overall PCE inflation just 0.5 percent from a year earlier and core PCE inflation 1.0 percent. After averaging below the Fed’s target in the 2009 to 2020 expansion, inflation has slowed further; very low inflation gives the Fed room to keep monetary policy highly expansionary and support the recovery.
Leading and higher-frequency indicators continue to point to further improvement in economic data in June. The Markit manufacturing PMI rose to 49.6 in the June flash estimate from 39.8 in May, while the services PMI rose to 46.7 from 37.5; while PMI levels below 50 are commonly thought to indicate contraction, strictly speaking they indicate that a larger share of survey respondents saw activity contract than grow; if larger companies are benefitting more from reopening than smaller companies, June’s PMIs could still be consistent with sequential growth. The Opportunity Insights daily trackers of consumer spending and employment rose sequentially in the week of June 12, and the Federal Reserve Bank of New York’s Weekly Economic Index fell 7.7 percent from a year earlier in the June 20 release, the smallest such decline since early March.
The Bank of Mexico cut its benchmark overnight interbank interest rate target 0.5 percentage point to 5.0 percent at its June 25 monetary policy decision, as expected. The monetary policy statement said that the crisis makes monetary policy in Mexico (like other developing economies) very complicated, but on balance, downside risks to inflation have increased. Financial markets price in another 1.0 percentage point reduction in the policy rate over the next year; advanced economies’ policy rates, either near zero or below it, and the deep global downturn make a clear-cut case for additional monetary stimulus in Mexico.
The Markit manufacturing PMI for the Eurozone rose to 46.9 in the June flash estimate from 39.4 in May, while the services PMI rose to 47.3 from 30.5. The European Commission’s Consumer Confidence Index rose to -14.7 in the June advance estimate from 18.8 in May. Like in the United States, improving sentiment surveys are a sign that the Eurozone’s economy has begun to recover. The ECB launched a Eurosystem Repo Facility for Central Banks on June 25: The facility will allow other central banks to borrow euros from the ECB secured by euro-denominated sovereign bonds and bonds issued by supranational institutions like the European Commission and European Stability Mechanism. The program parallels the Federal Reserve’s program that loans dollars to foreign central banks under similar terms, launched in March. These programs alleviate pressure on emerging market central banks, who otherwise would be forced to sell dollar and euro denominated reserve assets to fund intervention in support of their domestic financial markets during periods of financial volatility. These facilities give advanced economy central banks another tool to calm future episodes of global financial stress.
Industrial profits grew 6.0 percent from a year earlier in May, the first month of positive growth since November 2019; the statistic is somewhat misleading at present since it only compares the gross profits of profitable firms with gross profits of profitable firms a year earlier, and does not account for the losses of unprofitable firms. Even so, the indicator is directionally accurate and consistent with a Chinese economic recovery led by manufacturing and industry.
A slow recovery could be underway in Japan, although the global supply chain dislocation caused by the pandemic still seems to be holding back global manufacturing in June. The Jibun Bank manufacturing PMI for Japan edged down to 37.8 in the June flash estimate from 38.4 in May, while the services PMI rose to 42.3 from 26.5. Retail sales rose 2.1 percent in May from April in seasonally-adjusted terms after a 9.9 percent decline in April and a 4.6 percent decline in March.
The Markit manufacturing PMI rose to 50.1 in the June flash estimate from 40.7 in May, while the services PMI rose to 47.0 from 29.0. The Confederation of British Business retail sales index rose to -37 in June from -50 in May.
The Central Bank of Brazil (BCB) revised down its 2020 real GDP forecast to -6.4 percent in its June Inflation Report from zero in its March Inflation Report reflecting the impact of the pandemic on the Brazilian economy; central bankers repeated their guidance from their June 16 decision, that “the current state of affairs continues to recommend an unusually strong monetary stimulus, but [the BCB] recognizes that the remaining space for monetary policy stimulus is uncertain and should be small.” In the minutes from the June 16 meeting, the BCB noted that despite demand-driven disinflationary shocks, the Monetary Policy Committee “reaffirms its commitment to the inflation target.” The inflation targets for 2020, 2021 and 2022 are 4.0 percent, 3.75 percent and 3.5 percent respectively. Brazil’s consumer price index the IPCA-15 rose 1.9 percent in the 12 months to mid-June, a record-low, following a 2.0 percent rise the prior month. The BCB is likely to make one more 25 or 50 basis point cut to the Selic rate below its current record-low 2.25 percent level, then pause to evaluate the effect of its stimulus and the outlooks for the pandemic, inflation and Brazil’s exchange rate.