US spare capacity declining

The release of the BEA's second estimate of US's Q1 GDP is expected to show a contraction of 0.7% qoq annualised, marking a weaker start to 2015 than initially reported (+0.2%). Key for the  Federal  Reserve now  is  the  magnitude  of  the  Q2  rebound  and  the  level  of  slack in  the economy. Analysts look  for firm growth  ahead,  a  picture that the  data  should  reflect over  the coming  weeks.

Indeed, analysts  see  the  jump in  April  housing  starts  as  a  turning  point  for  the economic  surprise indicator   which   has   suffered   significant   disappointment   since   the beginning  of  the  year. Indeed,  in  the  week  ahead,  we  expect look  for  above  consensus outcomes on both durable goods orders and new home sales.

Equally  important, however, is  the  question  of slack  in  the  labour  market.  As  noted  by Fedchair  Yellen on 22 May, "Delaying action to tighten monetary policy until unemployment and inflation are already back to our objectives would risk overheating the economy". Friday's stronger-than - expect reading on core inflation, up 0.3% mom and 1.8% yoy, delivered further evidence that this  metric is still  well  anchoreddespite  low  headline  inflation  readings.

And while  average hourly earnings  disappointed  in  April  at 2.2%  yoy,  the  ECI  (employment cost index) clocked in at 2.6% yoy for Q1, notes Capital Economics. The two measures have diverged for some time, but the ECI  is  generally  considered  the better  measure,  including other  forms of  compensation and benefits, having broader coverage and using fixed employment weights.