Economic Data Points

There are a number of very important economic data points that will bereported this week, including GDP, PCE, and nonfarm payrolls.  Consensus expectations for Core PCE, which is the Federal Reserve’s favored measure of inflation, are low at 1.1%.  The Fed has indicated that they will keep interest rates low unless inflation rises above 2.5%, but they have not set a formal lower bound, though there has been some mention of using 1.5%.  If the Fed were to set a 1.5% lower bound, then if inflation is below that level they will not increase the fed funds rate.  Meanwhile, on the labor front, the consensus estimate for July nonfarm payrolls is plus 185k, which would continue the firmer tone to the labor data.  While expectations for second quarter GDP growth are quite low, at 1%, these initial estimates could be significantly off due to revisions to first quarter data.  The Bureau of Economic analysis is revising the methodology for calculating GDP and they expect to add nearly 3% to the current level of GDP and to increase growth rate figures for the first quarter.   The revised GDP methodology would start counting spending on research and development and copyrights as investments.   Gross Domestic Income, an alternative measure of total output, has been markedly higher than GDP over the last several years and if revisions to GDP move it to the level of GDI, growth in the first quarter would be closer to 2.2% than the initially reported 1.6% q/q annualized rate.  Many economists expect growth to pick up the second half of the year despite their low estimates for second quarter growth.  At SNWAM we will continue to watch these economic figures closely as they will play a significant role in how the Federal Reserve adjusts their policy going forward.