Apart from hiring, a lot of U.S. economic data still flashing green

June 7, 2016

Federal Reserve Chair Janet Yellen may still be hedging her bets on when interest rates will rise next, but with the one notable exception of weak hiring in May, many of the economic data in recent weeks suggest the next hike could still come sooner rather than later.

Last week’s employment report showed just 38,000 new jobs were created by the world’s largest economy in May against expectations of 164,000, and well below an average 200,000 a month or more of new jobs that has held over a very long time.

That shocked markets, stoking concerns the job market is slowing more than normal this late in the cycle.

But apart from that surprise, the trend in economic reports since the Fed last met to set policy has been rather good — at least based on how the data have been faring versus private forecasts. That same May jobs report had the unemployment rate down to 4.7 percent, the lowest since November 2007, getting very close to what many would consider full employment.

An analysis of Reuters polls shows 14 of 21 of the more critical data releases, from housing to services to business activity to consumer spending, have come in at or above expectations.

Seven came in below the median forecast, although over half of those were released late-April to early-May, suggesting the economy picked up some momentum since then.

Of the top indicators, a third came in higher than the highest forecast, while only about one in 10 came in lower than the lowest one.

U.S. econ chart ex initial claims

Several of Yellen’s colleagues have been sending out hawkish messages over recent weeks, suggesting it’s more a matter of deciding over whether to hike in June or July, not whether or not rates will go up this summer.

Indeed, the Fed rhetoric has been so strong and frequent in recent weeks that some think the central bank could be at risk of seriously harming its credibility if it fails to deliver one soon.

Still, there are some who now say the Fed will move only after the U.S. Presidential election in November. That would open up a year or more gap since the first hike last December, stretching the definition of “gradual.”

Yellen gave a mostly upbeat assessment of the economy on Monday, helping keep speculation alive of a near-term rate hike but not committing herself either way. So while June is off the table and July isn’t fully priced in, it’s about 50-50 for September.

Wall Street’s top banks polled by Reuters just after the jobs report on Friday unanimously expect the Fed to take a pass at this month’s meeting, in part over uncertainty around Britain’s referendum on European Union membership a week later on June 23.

But most still expect a 25 basis point hike in the fed funds target rate by the end of September, nine months after it raised rates for the first time in nearly a decade.

Other than moving too soon, the serious risk of course is that the longer Yellen waits, the higher the chances  the economy turns down again before they have a chance to get rates any higher. That would close with it a window of opportunity the Fed has to perhaps be a little bit more prepared for that next downturn.

(Additional reporting by Shrutee Sarkar)

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