The Week Ahead: Employment and GDP Under Heavy Scrutiny

Market participants may be watching the Bureau of Labor Statistics’ May employment situation a little more closely than usual when it is released on the morning of Friday, June 3, since this will be the last one released before the next Federal Open Market Committee (FOMC) meeting on June 14-15.

The April jobs summary was largely a disappointment, reporting just 160,000 jobs added along with downward revisions for both February and March. Adding to that was the weak GDP growth in the advance first quarter estimate released in late April (0.5 percent), which caused many analysts to downgrade their economic forecasts for the remainder of 2016.

While the employment situation figures heavily in the Fed’s assessment of the economy when determining when to raise rates, the GDP is also an important component. The GDP bounced back somewhat in the second estimate for Q1, released on Friday, May 27. The Bureau of Economic Analysis reported GDP growth at annual rate of 0.8 percent for the second estimate, still down from Q4’s GDP growth rate of 1.4 percent.

“Real GDP has been on a downward trend since the second quarter of 2015 (growth: 3.9 percent), a result of slower or negative growth in personal consumption spending, private investment, and exports,” said Carmel Ford of the National Association of Home Builders (NAHB). “It is important to note that although overall private investment has dropped, residential fixed investment growth has accelerated. The residential fixed investment component of GDP grew at a seasonally adjusted annual rate of 17.1 percent in the first quarter, up from 10.1 percent in the fourth quarter of 2015. This GDP component includes the construction of new single-family and multifamily units, remodeling, and other activities related to housing.”

Curt Long, Chief Economist from the National Association of Federal Credit Unions (NAFCU), stated, “While first-quarter GDP remained low despite the upward revision, there are a number of reasons to anticipate a rebound in the second quarter. Incoming data has been noticeably stronger, the drags from low oil prices and a strong dollar were less than previously estimated, and there is still a possibility that the government’s seasonal adjustment continues to underestimate GDP in the first quarter while boosting it in subsequent quarters. Overall, this is another in a string of positive data releases which will provide plenty of ammunition for the Fed to raise rates no later than July.”

It may be sooner; Fed officials have dropped strong hints that a June rate hike is forthcoming. Fed governor Jerome Powell, a voting member of FOMC, said in a public address on Thursday that he believes the economy is on “solid footing" and that the economy could be ready for the Fed to raise the federal funds target rate “fairly soon.” After June, the next FOMC meeting will be July 26-27.

The FOMC refrained from raising the federal fund rate at the April meeting, even with further improvement observed in the housing sector. However, speculation persists about another rate hike by the Fed in June, which would be the first time the Fed has raised the federal funds target rate since the historic liftoff in December.

Construction Spending

Construction spending bounced back in March after experiencing the largest decline in three months and raising unexpected concerns among market watchers in the industry. Now, the industry is awaiting the new spending numbers to see if those previous gains spilled into April.

The U.S. Census Bureau of the Department of Commerce  reported that construction spending for March was estimated at a seasonally adjusted annual rate of $1.137 trillion, 0.3 percent higher than February’s estimate of $1.133 trillion. Year-over-year, construction spending was up 8.0 percent from the March 2015 estimate of $1.052 trillion.

Construction spending totaled $240.4 billion for the first 3 months of this year, up 9.1 percent from the $220.3 billion reported for the same period in 2015.

The National Association of Home Builders (NAHB) reported Monday that it “anticipates accelerating growth for single-family spending in 2016.”

Here is the lineup for the week:

Tuesday, May 31

S&P Case-Shiller Home Price Index
9:00 A.M. EST

Wednesday, June 1

U.S. Census Bureau Construction Spending
10:00 A.M. EST

Federal Reserve Beige Book
2:00 P.M. EST

Friday, June 3

Bureau of Labor Statitics Employment Situation
8:30 A.M. EST