The economic numbers start rolling in again after a lull due to a long holiday weekend in the UK and US. One of today’s key releases is the CBI Distributive Trades Survey for Britain, which will provide an early estimate of retail spending for May. Later, the US economy is in focus with two reports: Durable goods orders for April and the preliminary numbers for the services sector via Markit’s purchasing managers’ index.
UK: CBI Distributive Trades Survey (10:00 GMT) Is the surprisingly soft pace of economic growth in this first quarter an early clue that Britain’s recovery has peaked? GDP increased 0.3% in the first three months of 2015 - half the rate against the previous quarter and well below what the consensus forecast was anticipating for this year's start.
The early numbers for Q2 paint a mixed picture and so it’s debatable if Q1’s deceleration is a temporary slowdown. On the plus side, the Markit/CIPS UK Services Purchasing Managers’ Index (PMI) rose to an eight-month high in April, signalling an acceleration in growth at a robust pace.
By contrast, the manufacturing PMI inched closer to the neutral mark last month, dipping to 51.9. But if manufacturing’s weakness has bearish implications for the broader economy, it’s not showing up in the labour market, which continued to strengthen last month, based on The Recruitment and Employment Confederation and KPMG Report on Jobs.
Meanwhile, this month’s GDP nowcast ticked up to 0.4% for the three months through April against 0.3% in the January-to-March period, according to the National Institute of Economic and Social Research (NIESR). “We expect the slight softening of GDP growth experienced in the first quarter of this year to be temporary and forecast the UK economy will expand by 2½ percent for the year as a whole,” the group said earlier this month.
NIESR’s optimistic outlook will be tested today with one of the first data points for May. The CBI Distributive Trades data - viewed as a leading indicator for retail spending - won’t resolve the debate, but it will provide a preliminary estimate for deciding how the economy is faring midway through the second quarter.
The numbers of late look a bit soft, with April’s dip to 12 reflecting a slowdown in growth relative to the strong gains in previous months. But some analysts say today’s update will deliver a modest improvement. If that forecast proves to be wrong, and the index slumps further, the view that the economy’s recent weakness is temporary will take a new hit.
US: New Durable Goods Orders (12:30 GMT) The crowd is still looking for signs of a solid rebound in the second quarter after Q1's sharp slowdown. To be fair, there are some encouraging clues to consider, including the downside bias in jobless claims this month; a robust April rebound in payrolls; and last month’s pop in residential housing construction. But there’s enough weakness elsewhere to keep the crowd guessing.
Today’s April report on new orders for durable goods isn’t expected to provide much support for optimism. The consensus forecast sees the headline number for orders slumping 0.6% for the monthly comparison, according to Econoday.com. If true, the news will be especially disappointing because it will follow a strong 4.4% jump in orders for March - the biggest monthly increase since last July. The sharp rise inspired some analysts to argue that the foundation for a Q2 rebound was in place.
It still is, according to Federal Reserve Chair Janet Yellen. In a speech last Friday, she said that the economy will strengthen after a rocky start in 2015. "If the economy continues to improve as I expect, I think it will be appropriate at some point this year to take the initial step to raise the federal funds rate target.”
Maybe so, but an upbeat outlook will remain challenged if durable goods orders slump in April. If accurate, the mild 0.6% dip that's expected will translate into a fractional year-on-year decline, which would be the first case of red ink for the annual comparison since last November.
US: Services PMI (13:45 GMT) Last week’s preview of economic activity in May via Markit’s business survey data for the manufacturing sector reaffirmed that the US continues to struggle with lacklustre economic performance. Although the purchasing managers’ index (PMI) remained above the neutral 50.0 mark, the dip to 53.8 reflects the slowest pace of expansion in 16 months.
“The weaker order book trend doesn’t appear to have affected hiring, at least not yet, with job creation picking up in May,” noted Chris Williamson, Markit’s chief economist. “However, unless production growth revives there is a worry that payroll growth will slow as companies seek to boost productivity.”
One reason for considering the possibility that manufacturing’s deceleration isn’t a danger sign for the business cycle is the considerably stronger trend in the services sector, which represents a much larger slice of economic activity.
Indeed, growth accelerated to a 10-month high last month, according to the Services PMI. Using this index as a gauge, the macro trend shows minimal signs of stalling, much less contracting. Notably, employment growth remains “resilient”, according to Williamson.
A similar message emerged in the April survey numbers for services via the Institute for Supply Management - the group’s Non-Manufacturing Index remained close to an eight-month high last month.
Today’s PMI release is expected to dip slightly, to 56.5 for the flash estimate for May against 57.4 in the previous month, based on Econoday.com’s consensus prediction. But that still equates with a healthy expansion, albeit one that’s a touch slower than we’ve seen in recent months.
Disclosure: Originally published at Saxo Bank TradingFloor.com