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Highlights of the Minutes from the April 24/25 FOMC meeting
May 16, 2012
- The FOMC viewed that the economy “had been expanding moderately” in the inter-meeting period and generally agreed that the economic outlook was “broadly similar” to March.
- In terms of the discussion policy, “several members” indicated that “additional monetary policy accommodation could be necessary if the economic recovery lost momentum” or if the downside risks to the outlook “became great enough.” This represents a more dovish tilt than in the March meeting in which “a couple of members” suggested that further policy stimulus could “become necessary if the economy lost momentum” or if inflation seemed likely to come in below the FOMC’s 2% medium-run target.
- The minutes from the FOMC’s April meeting indicate that despite the modest upgrade of the assessment of current conditions and near-term growth and employment forecasts released with the April policy statement (which somewhat reduce the odds of additional securities purchases by the central bank), additional policy accommodation remains on the table. The minutes restated the Fed’s willingness to act if it becomes apparent that the recovery is in need for further policy support.
The Minutes of the April 24/25 FOMC meeting indicated that Committee members viewed that the economy “continued to expand moderately” in the period since the last meeting in March. While some members noted increased confidence in the “durability of the recovery”, other cautioned against prematurely inferring strong underlying trends given the possibility that the data partially reflect the impact of the “mild winter weather or other temporary influences.” The assessment of the outlook was “little changed” as the information flow over the inter-meeting period suggested that growth would “remain moderate over the coming quarters and then pick up gradually.” Given the “broadly similar” outlook, members agreed that it “would be appropriate to maintain the existing highly accommodative stance of monetary policy.”
In the discussion of the economic backdrop, the Committee noted that labour markets had improved in recent months and though the unemployment rate had fallen, almost all members viewed the unemployment rate as elevated relative to the level consistent with its mandate. Strains in the global financial markets stemming from the goings-on in Europe were again noted as posing significant downside risks to growth as were possibilities that US fiscal policy “would be more contractionary than anticipated” and that the uncertainty surrounding fiscal policy could dampen hiring and business investment. With regard to inflation, most members anticipated that recent price pressures would prove temporary and that inflation would subsequently “run at or below” a rate consistent with the Fed’s mandate. One member, however, voiced concern about upside risks to inflation if the current monetary policy stance was maintained “much beyond this year.”
In terms of the discussion policy, “several members” indicated that “additional monetary policy accommodation could be necessary if the economic recovery lost momentum” or if the downside risks to the outlook “became great enough.” This represents a more dovish tilt than in the March meeting in which “a couple of members” suggested that further policy stimulus could “become necessary if the economy lost momentum” or if inflation seemed likely to come in below the FOMC’s 2% medium-run target. Policymakers also discussed adopting simple monetary policy rules as guides for decision-making and external communication about policy, though no consensus was reached and it was planned to discuss the topic further at a future meeting.
The minutes from the FOMC’s April meeting indicate that despite the modest upgrade of the assessment of current conditions and near-term growth and employment forecasts released with the April policy statement (which somewhat reduce the odds of additional securities purchases by the central bank), additional policy accommodation remains on the table. The minutes reiterated that the Fed stands ready to act if it becomes apparent that the recovery is in need of further policy support with a larger contingent (“several” versus “a couple” at the March meeting) supporting the view that further policy accommodation could become necessary. With the next policy decision not due until late next month (June 19/20), the information flow over the coming weeks will likely take on added significance as a determinant of the FOMC’s next policy steps.
David Onyett-Jeffries, Economist, RBC Economics
US housing starts rose in April; first quarter revised up
- Housing starts rose 2.6% to an annualized pace of 717,000 units in April from an upwardly revised 699,000 in March, beating market expectations for 685,000 units. Building permits slipped by 7.0% following March's sharp 8.8% jump.
- Multiple-unit starts up 3.2% to 225,000 from 218,000 in March. Single starts up 2.3% to 492,000 from 481,000.
- Regionally, Southern states and Midwest posted gains that were only partially offset by declines in the Northeast and West.
Warmer-than-usual winter weather was partly responsible for the pickup in construction activity in the first quarter, with April providing a cleaner read on activity levels. To the extent that starts remained close to the first quarter's level, this report suggests that the housing market has found its feet. However, the average price of a new home in the first quarter was 14.6% below its peak and at 8.1%, the unemployment rate remains historically high. These factors will limit the upside to residential construction activity with only a gradual rise in starts expected in 2012/2013.
Privately owned housing starts in the US rose 2.6% in April to an annualized pace of 717,000 units, from a revised 699,000 units in March (previously reported as 654K,000) Market expectations going into the report had been for an increase to 685,000 (+4.7%) while RBC looked for a 2.4% gain. April's increase was the result of a 3.2% increase in the volatile multiples component to an annualized pace of 225,000 from 218,000 the prior month. Single starts posted a 2.3% rise to 492,000.
Building permits dropped by 7.0% in April following the sharp 8.8% rise in March. On net, permits stood at 715,000 in April, just slightly below the first-quarter average of 720,000. Market expectations going into the report were for a 2.2% drop in permits. April's decrease was due to a 20.8% drop in the multiples component, with permits for single-family homes rising 1.9%. Multiple-unit permits surged by 32.3% in March, with April's decline leaving the level just shy of the first quarter's 255,000 average.
Housing starts stabilized in April after rising in the first quarter to average 712,000 annualized units, a 5.0% increase over the fourth quarter and a 22.1% increase on a year-over-year basis. Warmer-than-usual winter weather was partly responsible for the pickup in construction activity in the first quarter, with April providing a cleaner read on activity levels. To the extent that starts remained at the first quarter's elevated levels, this report suggests that the housing market has found its feet. This was corroborated by yesterday's Homebuilders' housing market sentiment index, which hit a post-recession high. The improvement in the labour market in 2012, combined with record low interest rates and low housing prices, has made housing affordability very attractive. Having said that, the average price of a new home in the first quarter was 14.6% below its peak and at 8.1%, the unemployment rate remains historically elevated. These factors will limit the upside to residential construction activity, with only a gradual rise in starts in 2012/2013 expected.
Dawn Desjardins, Assistant Chief Economist, RBC Economics
US industrial production posts larger-than-expected gain in April
- Industrial production jumped 1.1% in April, beating expectations for a 0.6% increase going into the report.
- The previously reported flat readings for both February and March were revised to show changes of +0.4% and -0.6%, respectively, though the first-quarter average was unchanged.
- Manufacturing production rose 0.6% to more than reverse the previous month’s downwardly revised 0.5% decline. Mining posted a 1.6% monthly increase to retrace the similar-sized decline seen in March while utilities output surged 4.5%.
- The capacity utilization rate jumped to 79.2% in April from 78.2% (previously 78.6%) in March.
- Despite the significant weakness seen in utilities output over the winter as warmer-than-usual temperatures significantly reduced demand for home heating, industrial production managed to post solid quarterly increases in the fourth quarter of 2011 and the first quarter of 2012 as strength in the manufacturing sector buoyed overall measure. The return of normal weather conditions likely means that the recent improvement in the utilities sector will be maintained in the near term, which combined with the continued underlying strength in manufacturing should set the stage for further expansion in overall industrial production in the second quarter.
US industrial production jumped 1.1% in April, beating market expectations going into the report for a 0.6% increase. The previously reported flat readings for both February and March were revised to show changes of +0.4% and -0.6%, respectively, though the net impact of the revisions saw the first-quarter average remain unchanged. With the jump in production, the capacity utilization rate rose to 79.2% in April from a revised 78.4% level in March (initially reported as 78.6%). This represents the highest level of capacity utilization since April 2008.
The headline jump in industrial production in April reflected solid gains across industry groups. Manufacturing production rose 0.6% to more than reverse the previous month’s 0.5% decline and bring the index to its highest level since August 2008. Within manufacturing, strength was seen in the durable goods component (+1.3%) reflecting a 3.9% jump in motor vehicle & parts production. Non-durable goods production posted its second consecutive decline (-0.2%) to provide some offset. Utilities output surged 4.5% in April, reflecting the return to more seasonal conditions after the warmer-than-usual weather significantly reduced demand over the winter. Mining output also increased in April, rising 1.6% to mostly retrace the previous month’s 1.7% decline.
The unseasonably warm winter this year reduced home-heating demand and weighed heavily on utilities output in the fourth quarter of 2011 and the first quarter of 2012, seeing production drop by a cumulative 7% over that period. Despite this significant weakness, industrial production managed to post solid quarterly increases as strength in the manufacturing sector buoyed overall measure. The return of more normal weather conditions likely means that the recent improvement seen in the utilities sector will be maintained in the near term, which combined with the continued underlying strength in manufacturing should set the stage for further expansion in industrial production in the second quarter. Overall, today’s report suggests that the industrial sector of the US is maintaining its momentum into the second quarter of 2012, suggesting that the sector should continue to provide significant support to the expansion of the economy as a whole.
David Onyett-Jeffries, Economist, RBC Economics
To view charts of today's data, go to
http://www.rbc.com/economics/html_calendars/ca/calendar.html (Canada)
http://www.rbc.com/economics/html_calendars/us/calendar.html (United States)
Recent Economic Updates
U.S. retail sales increased as expected in April
May 15, 2012
- Retail spending inched up 0.1% in April 2012, which was in line with market expectations, and followed solid 0.7% (revised from 0.8%) and 1.0% (was 1.1%) gains in March and February, respectively.
- Motor vehicles and parts sales rose 0.5% in April, which was consistent with the previously reported 0.4% rise in unit vehicle sales in the month.
- Excluding the auto component, sales also rose a modest 0.1% following an unrevised 0.8% jump in March. Much of the moderation in the pace of growth reflected declines in sales at gasoline and building material stores. The rise in April was modestly below market expectations for a 0.2% increase.
- The so called ‘control’ retail sales (which exclude sales of gasoline, motor vehicles, and building materials, and they enter directly into the Bureau of Economic Analysis’ consumer spending estimate) climbed a decent 0.4% following a similar 0.4% increase in March and a 0.6% gain in February.
- The gain in control sales in April following solid increases in prior months left the measure at an already annualized 3.5% above its first-quarter 2012 average. As well, while the weaker gain in overall April retail sales likely reflected some payback from weather-related strength during the winter, we expect some offset from a bounce back in utilities spending that will support spending on services. As a result, we continue to expect an annualized 2.7% gain in real consumer spending in the second quarter of 2012, which would be close to the solid 2.9% increase in the first quarter.
Retail sales rose a modest 0.1% in April 2012, slowing from sizeable 0.7% and 1.0% gains in March and February, respectively. Sales of motor vehicles and parts rose for a third consecutive month, posting a 0.5% increase that was in line with a previously reported 0.4% rise in unit vehicle sales in the month.
Excluding the auto component, retail sales inched up a similar 0.1%, slowing from solid 0.8% and 1.0% increases in March and February, respectively. Part of this slowing was the result of a 0.3% drop in sales at gasoline stations following sizeable increases of 1.0%, 3.3%, and 1.5% from March to January, respectively. This pattern largely reflected changes in gasoline prices that rose sharply in the first quarter of the year before falling, on a seasonally adjusted basis, in April. As well, building material sales fell 1.8% following solid increases in the previous four months. The retracement of part of this strength in April likely reflected an easing in this positive weather effect as temperatures returned to closer to normal in the spring.
The component of retail sales that goes into the GDP add-up, the so called control retail sales that exclude the motor vehicle, gasoline station, and building materials components, climbed 0.4% in April following a similar 0.4% gain in March and a 0.6% increase in February thereby suggesting a relatively minimal weather effect on this key component.
The gain in control sales in April, following solid growth in previous months, left the measure already at an annualized 3.5% above its first quarter level. As well, while a return to seasonal weather in the spring likely was a factor that weighed on overall April retail sales, the effect of weather on overall consumer spending in the month is not unambiguous. In particular, spending on services, which is not captured in the retail trade survey, was weighed down in the fourth quarter of last year and the first quarter of 2012 by sharp declines in utilities consumption because warmer than normal winter temperatures reduced the need for home heating. A return to normal temperatures in the spring should see much of that weakness reversed. As a result, we continue to expect an annualized 2.7% gain in real consumer spending in the second quarter of 2012, which would be close to the solid 2.9% increase in the first quarter of the year.
Nathan Janzen, Economist, RBC Economics
U.S. consumer prices held steady in April, but core prices increased
- April 2012 consumer prices met expectations and held steady in the month following the 0.3% gain in March.
- Gasoline prices fell 2.6% partially to unwind the increases seen in the previous three months.
- Core prices also came in as expected by rising 0.2% in the month.
- The annual increase in the overall CPI moderated to 2.3% in April from 2.7% in March while the core rate held at 2.3%.
- The decline in energy prices in general, and gasoline prices specifically, was the main factor weighing on headline consumer price index (CPI) in April and resulted in the sharp moderation in the year-over-year rate. The annual increase in core prices remains above 2%; however, we continue to expect that the persistently high unemployment rate and implied slack in labour markets will put downward pressure on core inflation, seeing the rate drift below 2% during the course of this year.
Expectations for the April 2012 consumer price index (CPI) report were for weakness in energy prices in the month to offset another modest increase in core prices and leave the overall index unchanged from March. In the event, this expectation was confirmed as the overall CPI held steady following March’s 0.3% increase as the energy component, which had increased in each of the previous three months, declined by 1.7% thereby reflecting a 2.6% decline in gasoline prices. On a year-over-year basis, the overall inflation rate moderated to 2.3% from 2.7% in March. This represented the slowest pace of annual growth since February 2011.
Excluding food and energy prices, the ‘core’ measure rose an expected 0.2% in April thereby matching the like-sized gain seen in March. The upward pressure reflected sizable increases in prices for shelter, new and used vehicles, apparel, airline fares, and medical care services. On a year-over-year basis, the core CPI measure was up 2.3% in April thereby matching the annual rate seen in March.
The decline in energy prices in general, and gasoline prices specifically, was the main factor weighing on headline CPI in April, and while energy prices have posted strong gains during the early part of 2012 (up 10% on an unadjusted basis since December), they showed far greater upward pressure at this time last year thereby resulting in the sharp moderation in the year-over-year rate. With that said, the annual increase in core prices remains above 2% into the second quarter of this year as was the case in both the first quarter of 2012 and the final quarter of 2011. We continue to expect that the persistently high unemployment rate and implied slack in labour markets will put downward pressure on core inflation thereby seeing the rate drift below 2% during the course of this year. Such benign inflationary pressures would allow the Fed to focus on sustaining the recovery with the fed funds rate likely remaining in its current 0% to 0.25% range into 2014.
David Onyett-Jeffries, Economist, RBC Economics
U.S. producer prices dip 0.2% in April
May 11, 2012
- Producer prices fell 0.2% (month over month) in April 2012, which was below market expectations for an unchanged reading. The year-over-year rate of increase declined to 1.9% from 2.8% in March to mark the first time the measure has been below the 2% mark since October 2009.
- Excluding the volatile food and energy components, core prices rose 0.2% in April, which was below the 0.3% increase in March and equalled market expectations. The year-over-year rate of increase in core prices eased to 2.7%, which was down from 2.9% in March, and a recent peak of 3.0% in both February and January.
- The annual pace of increase in producer prices has slowed steadily since the summer of 2011 to leave the measure in April at its lowest level since October 2009. As well, the moderation in annual growth in core prices is in line with our expectation that persistent excess capacity in labour markets continues to keep a lid on underlying inflation pressures. We expect the easing in price pressure at the producer level to be evident in next week’s consumer price report, as well where we expect a similar 0.1% dip in overall prices reflecting a decline in energy prices being only partially offset by modest gains in food and core prices.
Producer prices fell 0.2% in April 2012 following an unchanged reading in March and a 0.4% gain in February. The drop in April was entirely accounted for by a 1.4% drop in energy prices that built further on a 1.0% decline in March. As was the case in March, falling gasoline prices accounted for much of the drop in energy prices in April. Food prices rose 0.2% in April, thereby matching a 0.2% increase in March that followed a 0.1% decline in February. Excluding both the volatile food and energy components, core producer prices rose a modest 0.2% in April, which was down slightly from a 0.3% increase March, and in line with the average 0.2% monthly increase over the previous six months. The Bureau of Labour Statistics noted that almost one-quarter of the monthly rise in core prices resulted from a 0.4% rise in the price of pharmaceutical preparations.
On a year-over-year basis, the pace of increase in the overall producer price index moderated sharply, falling to 1.9% from 2.8% in March, and left the measure further below a near-term peak of 7.1% in July 2011. Much of the moderation in annual price growth in recent months has resulted from sizeable increases in energy prices last year not being repeated to the same extent this year, along with a moderation in food price growth. In fact, the monthly decline in energy prices in April left the energy index 0.6% below its level a year ago; at which time, the annual pace of energy price growth was above 20%. Excluding both the food and energy components, annual core price growth was 2.7% in April, which was down from the 2.9% pace in March.
The annual pace of increase in producer prices has slowed steadily since the summer of 2011 to leave the measure in April at its lowest level since October 2009. This steady moderation occurred despite rising tensions in the Middle East earlier in 2012 that pushed oil prices higher as increases this year failed to match the intensity of gains during the first half of last year when oil prices were also pushed higher by more widespread geopolitical instability. As well, the moderation in annual growth in core prices is in line with our expectation that persistent excess capacity continues to keep a lid on underlying inflation pressures. We expect the easing in price pressure at the producer level to be evident in next week’s consumer price report as well, in which we expect a similar 0.1% dip in overall prices reflecting a decline in energy prices being only partially offset by modest gains in food and core prices. The resulting 2.1% annual increase in overall consumer prices in April would leave the lowest reading for that measure since February 2011.
Nathan Janzen, Economist, RBC Economics
U.S. trade deficit widened in March
May 10, 2012
- The US trade deficit was $51.8 billion in March 2012, which was larger than the expected $50.0 billion shortfall; February's gap was revised to $45.4 billion from $46 billion.
- Exports rose 2.9% in March and imports jumped by 5.2%.
- The widening in the trade gap in March was in line with that assumed by the Bureau of Economic Analysis (BEA). Recent data showing that inventory growth and construction spending were less than assumed by the BEA, however, raise the prospect that the growth rate will be nudged lower than the 2.2% pace originally reported. The prospect of the US economy growing at a faster pace in the second quarter of 2012 remains intact. The US economy continued to generate jobs in April, albeit more slowly than forecasters expected, and the unemployment rate headed lower with only some of the dip explained by the persistent decline in labour market participation. We do not see the slower pace of job creation as sufficient to cause a serious disruption in the pace of economic activity. Developments in Europe, on the other hand, have revived financial market stress, and weighed on stock markets with the potential to dampen business and consumer spending in the near term. On balance, US policymakers will be watching how the domestic economy performs in the near term with an eye on how global developments play out as they assess the need for further stimulus.
- In a separate report, initial claims for state unemployment insurance inched lower to 367,000 in the week ended May 5, 2012 from a revised 368,000.
Exports hit a record high in March 2012 rising 2.9% and building on February's 0.3% increase. Exports of capital goods, autos, and aircraft firmed in the month. The 3.0% rise in auto and parts exports tempered the effect of the 6.4% drop in February. Imports posted a solid 5.2% gain with only food and consumer goods ex-autos weakening in the month. Imports of petroleum products jumped 6.0%, with the average price for a barrel of oil rising to $107.95 from $103.63 in February. The volume of petroleum imports rose 5.3% in the month.
Excluding the effect of prices, the real trade balance (in chained 2005 dollars, Census basis) widened to -$48.9 billion from -$44.1 billion in February. This reflected a 3.6% increase in the volume of exports and a bigger 5.8% jump in imports.
The reported widening in the real trade deficit in March was broadly in line with the Bureau of Economic Analysis (BEA) assumption in its estimate of first-quarter 2012 GDP, thereby confirming that net exports made no contribution to growth in the quarter; however, a smaller addition from inventories and lower construction activity point to a small downward revision to the 2.2% annualized growth rate. Early reports on second-quarter 2012 activity are consistent with the economy building momentum. The reversal in initial claims for unemployment insurance during the past two weeks is consistent with a reacceleration in the pace of job creation following the somewhat disappointing 115,000 rise in April. Fed speakers in recent days have exposed that the rift regarding the appropriate timing to initiate the removal of policy stimulus persists. At the April Federal Open Market Committee meeting, the consensus view was that the very low level of the policy rate will remain in place "at least until late 2014."
In a separate report, US initial unemployment insurance claims edged down by 1,000 to 367,000 in the week ending May 5, 2012 from an upwardly revised 368,000 level the previous week. The four-week moving average of initial claims, which better controls for weekly volatility, slipped to 379,000 from 384,250 the previous week. Continuing claims fell 61,000 to 3,229,000 in the week ending April 28, 2012.
Dawn Desjardins, Assistant Chief Economist RBC Economics
U.S. April payroll employment showed a disappointing increase
May 4, 2012
- April 2012 non-farm payroll employment rose a weaker than expected 115,000 in the month, which was down from upwardly revised gains in both March of 154,000 (120,000 previously) and February of 259,000 (240,000 previously).
- The separate household survey indicated that unemployment rate dropped to 8.1% from 8.2% in March.
- Government employment declined 15,000 thereby resulting in private employment rising 130,000, which was down from April’s 166,000.
- Today’s report raised the risk that job growth is slowing going into spring period; however, it may still be the case that the employment numbers during the last two months reflect an offset from outsized gains in the winter period that benefitted from warmer than normal temperatures. The risk that a slowing trend in labour markets is emerging that is not solely the result of the warm winter weather will argue for the Fed to keep monetary conditions highly accommodative. It also raised the prospect of further asset purchases although that is only likely on indications of further weakening in labour markets and overall GDP growth.
Payroll employment rose a disappointing 115,000 in April 2012 and compared to expectations of a 160,000 increase. This represented a slowing from upwardly revised gains in both March of 154,000 (originally estimated as 120,000) and February of 259,000 (240,000). It is of note that in the past 24 months the initially reported gain in payrolls has been revised upward 20 times. The separate household survey indicated that the unemployment rate unexpectedly dropped to 8.1% from 8.2% in March and 8.3% in February. The drop in this rate, however, largely reflected a sizeable 342,000 drop in the labour force, which more than offset a 169,000 drop in household employment.
Government employment dropped 15,000 in the month thereby countering the earlier impression that pressure on this front was starting to ease. Thus, private employment rose 130,000 in April, which was down from gains of 166,000 and 254,000 in March and February, respectively.
The modest overall gain in private employment largely reflected goods-producing industries rising only 14,000 in the month after a 38,000 rise in March. Employment gains in manufacturing slowed to 16,000 from a 41,000 gain in March with construction continuing to decline by dropping 2,000 in April after a 3,000 decline in March. Service-producing industries saw a 116,000 increase in employment following a 128,000 jump in March. Strong April gains were recorded in professional and business services (62,000), and retail (29,000).
The hours worked measure held steady overall at 34.5 hours, for manufacturing, it rose to 40.8 hours from 40.7 hours in March. As well, overtime work rose to 3.4 hours from 3.3 hours in March. Despite a steady work week, the gain in employment was sufficient enough to send the index of aggregate weekly hours up 0.1% in the month thus reversing the 0.1% decline in March.
The index of average hourly earnings, the principal wage measure in the report, was unchanged in the month, which contributed to the year-over-year rate dropping to 1.8% from 2.0% in March.
Today’s employment report raised the risk of slowing in job gains going into the spring period; however, it may still be the case that the employment numbers for the last two months reflect an offset from outsized gains during the winter period that benefitted from warmer than normal temperatures. During the last five months, labour markets have generated on average 205,000 jobs with above-average gains from December 2011 until February 2012, and below-average increases in March and April 2012. The risk that this pattern is not solely weather related and that a slowing trend in labour markets is emerging, however, will argue for the Fed to keep monetary conditions highly accommodative. It also raised the prospect of further asset purchases although this is only likely on indications of further weakening in labour markets and overall GDP growth.
Paul Ferley, Assistant Chief Economist RBC Economics
RBC Economics Research contacts:
Paul Ferley, Assistant Chief Economist
Dawn Desjardins, Assistant Chief Economist
Kirsten Cornelson, Economist
Nathan Janzen,
Economist
David Onyett-Jeffries, Economist
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