US data review: GDP Q2 tracker lowered - Nomura

Construction spending:

Recent weak readings on construction spending suggest that there is a greater risk of the contribution from real private structures investment and residential investment to real GDP growth in Q2 being weaker following a strong boost in Q1. Construction spending remained flat in May, below expectations (Consensus: +0.3% m-o-m) although the back month of April was revised up to a decline of 0.7% m-o-m from a previously reported decline of 1.4%. The weakness in May appears broad-based. Nonresidential construction increased 0.3% but was largely offset by a 0.5% decline in residential construction. Private sector nonresidential construction, a proxy for the nonresidential structure investment component of GDP, declined 0.7%, marking the fifth consecutive month of decline. In addition, private residential single family construction, which tends to be more stable, declined 0.3% m-o-m, implying some slowdown in private investment in residential construction. 

ISM manufacturing index: 

The ISM manufacturing index improved to 57.8 in June from 54.9 in May, above expectations (Nomura: 55.0, Consensus: 55.2), with broad-based strength in sub-indexes. Today’s report suggests manufacturing activity expanded at a solid pace. Both production and new orders indexes showed improvement increasing 5.3pp to 62.4 and 4.0pp to 63.5, respectively. The backlog of orders index increased slightly to 57.0 from 55.0 while inventories decreased to 49.0, implying that demand picked up and this momentum may continue in the near term. Moreover, the new export orders index improved 2.0pp to 59.5, indicating that international demand remains upbeat. The uptick in this indicator appears consistent with recent improvement in goods exports. In addition, the employment index increased to 57.2 from 53.5, suggesting healthy hiring activity in the sector. The prices paid index eased to 55.0 from 60.5 indicating that raw material prices increased at a slower rate in June than in May. ISM reported price relief in basic commodities such as natural gas, distillates, oil, plastics, and steel, while finished items of these materials are showing some price growth. Overall, today’s report indicates continued health in the manufacturing sector. 

Vehicle sales:

At the time of writing, our tracking estimate of vehicle sales stands at an annual pace of 16.4mn units, which implies that the final figures may be below market consensus of 16.2mn. The weak sales data over the past few months reflect an industry grappling with tighter consumer auto loan lending standards as well as increased competition from used vehicle markets with used auto prices trending lower. Given the already-elevated levels of incentive spending by automakers, auto sales in 2017 could continue to struggle compared with the previous year, which may have an adverse impact on vehicle production. With decreases in motor vehicle output in Q1 2017 contributing a drag of 0.5pp to topline Q1 real GDP growth according to the BEA’s estimate, the current environment for automakers has the potential to further weigh down aggregate growth in coming quarters. 

Q2 GDP tracking update: Despite mixed back-month revisions, May construction spending was weaker in general. We lowered our Q2 GDP tracking estimate by two tenths of a percent to 2.5% q-o-q saar from 2.7% previously.