Still a Solid Case for Easing After Further Twists

Last week brought further changes to the outlook. In particular, the spending data were stronger than expected while the data for inflation again came in soft. We still see a high probability of a rate cut in the near term, though not at this week’s meeting. We see better-than-even odds of a July cut and a high probability of a cut by September. See our FOMC Briefing for our full take on this week’s meeting. There were no public remarks from policymakers last week because of the blackout period ahead of this week’s  FOMC meeting. 

The big surprise last week was the stronger-than-expected retail sales report for May, which changed the story about consumer spending and, indeed, final private demand in the first half. Retail sales in the control group—which includes only those categories of retail sales that are direct inputs into the PCE data—advanced a robust 0.5% in May. On top of that, gains in previous months were marked up. It now looks like consumer spending has picked up nicely in recent months after a weak patch early in the year. Industrial production also surprised the upside in May. While a sizable increase in utilities lifted that figure, a return to modest growth in manufacturing was a welcome development. After last week’s data, it looks like we could get real  GDP growth closer to 2% in Q2. 

In contrast to the spending data, developments last week further reinforced the weak inflation outlook.  The core CPI index posted a modest one-tenth increase in May, and import prices declined. But likely more worrying for the FOMC were developments concerning inflation expectations. In the preliminary Michigan survey for June, the measure of longer-term inflation expectations dropped four-tenths to 2.2%, an all-time low. Moreover, market-based measures of inflation compensation continued to fall. While inflation expectations have been front and center in discussions relating to the Fed’s framework review, they haven’t featured nearly as prominently as consideration for near-term monetary policy decisions. We expect that to change. Even with the real side looking better after last week’s retail sales data, we feel comfortable with our monetary policy call for a near-term easing because of the concerns about the stability of longer-term inflation expectations. As we’ve written, policymakers become very concerned if they see inflation expectations moving toward actual inflation, rather than the other way around. 

Nowcasts (2019:Q2) 

Source Current One Week Ago Two Weeks Ago
Atlanta Fed GDPNow 2.1% 1.4% 1.3%
New York Fed Staff Nowcast 1.4% 1.0% 1.5%
CNBC/Moody’s Survey 1.9% 1.7% 1.6%

Recent Data 

Release Period Actual Consensus Revision to  Previous ReleasePreviously  Released Figure
NFIB Small Business Optimism May 105.0 102.0 — 103.5
PPI Final Demand MoM May 0.1% 0.1% — 0.2%
PPI Final Demand YoY May 1.8% 2.0% — 2.2%
Core PPI MoM May 0.2% 0.2% — 0.1%
Core PPI YoY May 2.3% 2.3% — 2.4%
CPI MoM May 0.1% 0.1% — 0.3%
CPI YoY May 1.8% 1.9% — 2.0%
Core CPI MoM May 0.1% 0.2% — 0.1%
Core CPI YoY May 2.0% 2.1% — 2.1%
Import Price Index MoM May -0.3% -0.2% 0.1% 0.2%
Nonpetroleum Import Prices MoM May -0.3% -0.2% -0.5% -0.6%
Retail Sales Advance MoM May 0.5% 0.6% 0.3% -0.2%
Retail Sales Control Group MoM May 0.5% 0.4% 0.4% 0.0%
Industrial Production MoM May 0.4% 0.2% -0.4% -0.5%
Manufacturing (SIC) Production MoM May 0.2% 0.2% — -0.5%
Capacity Utilization May 78.1% 78.0% — 77.9%
U. of Mich. Sentiment Jun P 97.9 98.0 — 100.0
U. of Mich. 5-10 Yr Inflation Jun P 2.2% — — 2.6%

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