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Getting more for your Q2 money
Simply Economics - July 28, 2017
By Mark Pender, Senior Editor



Low rates of inflation may be raising concern that underlying demand is on the ebb but it is giving us purchasing power. Lack of inflation is one of the good news/bad news themes of the second-quarter GDP report which in any case showed fundamental strength of its own, getting support from key components and helping to firm what were sagging economic trends.


The economy

Second quarter GDP hit Econoday's consensus dead on, at a 2.6 percent annualized growth rate. This is one of the best showings of the last 2 years and holds the trend at the 2 percent  line. It follows, however, the first quarter's downwardly revised 1.2 percent pace. The two quarters together are in the sub-2 percent zone and a bit below the bright expectations early in the year. The report included benchmark revisions that boosted 2014 and 2015 but shaved 2016 by 1 tenth to only 1.5 percent.


Another bullseye for the Econoday consensus was the 2.8 percent showing for consumer spending, which is the single biggest piece of GDP. Durables spending surged to a 6.3 percent rate boosted by improvement in what were still soft sales of vehicles. Nondurables rose 3.8 percent despite flat food sales and contraction in gasoline sales. Inflation for both food and energy are running in the low single digits which holds down spending totals and could hold back the third quarter as well.


And here's a reading from the second quarter that is below trend. The GDP price index came in at 1.0 percent, half that of the prior two quarters and pulling the trend line down to 1-1/4 percent. GDP data are adjusted for the effects of inflation, earning the label of 'real'. A falling rate of inflation, after adjustment, pulls down the raw dollar total less so than the prior quarter, giving a relative boost to the adjusted numbers. More for your money is what you get from low inflation!


Residential investment is not the second quarter's big highlight. Spring's selling season proved soft and investment proved very soft, falling at a 6.8 percent rate for the worst showing since gyrations early in the expansion. The last five quarters, taken together, have been weak as construction of new homes, though rising, has been limited and has been holding down housing sales in general. Sales of new homes, data released early in the week, did rise in June but slowed during the quarter overall.


Not slowing, at least not much, is business investment, coming in at 5.2 percent which, next to 7.2 percent in the first quarter, is the best in nearly 3 years. Business investment held first-half GDP together, proving itself the difference so far in the 2017 economy. Structures have been strong this year but it was equipment investment, at 8.2 percent, that led the quarter. Hints on third-quarter equipment are mixed as orders for capital goods, released with the week's durables data, have been uneven.


All the red ink you see is the nation's trade gap, at a very deep annualized rate of $615 billion in the quarter. But this is slightly less than the first quarter's $622 billion rate which, for GDP, is a plus, contributing 2 tenths to the quarter's 2.6 percent rate. Alerts of the improvement came the day before the GDP report with advance June data on goods trade, a report that also included advance data on inventories which ended the quarter steady and lean.


Consumer sentiment rounded out the week's news, finishing July at 93.4 for the softest showing since October. It was Trump's victory that sent these two indexes higher, though sentiment proved to have much weaker legs than confidence. If readings on consumer attitudes are supposed to translate into actual consumer spending, then a split between these two indexes, cheated to the sentiment side, would probably best represent the actual path for spending: "moderate" is the FOMC's assessment.


Markets: Time to unwind

The FOMC held rates steady at the week's meeting and set the timing of the unwinding at "relatively soon". This could mean the meetings in either September or December but remember the minutes of the June meeting hinted that more of the members then, citing low inflation, favored later over sooner. And the inflation news since, as the July statement noted, hasn't been that great. Stocks were mixed in the week with oil back up near $50 as the Saudis talk up output cuts.


Markets at a Glance Year-End Week Ended Week Ended Year-To-Date Weekly
2016 21-Jul-17 28-Jul-17 Change Change
DJIA 19,762.60 21,580.07 21,830.31 10.5% 1.2%
S&P 500 2,238.83 2,472.54 2,472.10 10.4% 0.0%
Nasdaq Composite 5,383.12 6,387.75 6,374.68 18.4% -0.2%
Crude Oil, WTI ($/barrel) $53.71 $45.66 $49.70 -7.5% 8.8%
Gold (COMEX) ($/ounce) $1,152.50 $1,260.70 $1,275.80 10.7% 1.2%
Fed Funds Target 0.50 to 0.75% 1.00 to 1.25% 1.00 to 1.25% 50 bp 0 bp
2-Year Treasury Yield 1.21% 1.35% 1.35% 14 bp 0 bp
10-Year Treasury Yield 2.45% 2.24% 2.29% –16 bp 5 bp
Dollar Index 102.26 93.93 93.28 -8.8% -0.7%


The bottom line

With inflation as low as it is, consumer purchasing power is strengthening. This of course is good but then again it may be dulling our ambitions, that is limiting what should be our spirited pursuit of higher wages. For GDP, the first-half pace is just below the 2 to 2.5 percent range that the FOMC expects for this year. What pieces are in place for the second half? Consumer spending should get continued support from strong employment if not from wage growth; housing had a tough quarter but business investment is up and with that manufacturing in general. Inventories look well balanced with net exports weak but perhaps improving. The year's original growth goal, even without tax cuts or fiscal stimulus, looks within reach.

Week of July 31 to August 4

A busy week that will define the strength of June and offer the initial indication for July begins with pending home sales on Monday where a long awaited bounce back is once again the expectation. Personal income and outlays on Tuesday will separate out June's consumer data from last week's second-quarter GDP report and not much strength, for either consumer spending or PCE inflation, is expected. Vehicle sales on Tuesday will open July's consumer data while factory orders on Thursday will close out June data on manufacturing. PMI and ISM reports are also out on Thursday and will offer hints on July conditions in the service sector. Employment will cap the week and is expected to post another solid showing, at 180,000 for July nonfarm payroll growth and a bounce back to a respectable 0.3 percent monthly gain in average hourly earnings.




Chicago PMI for July

Consensus Forecast: 62.0

Consensus Range: 58.0 to 65.3


The Chicago PMI has been steadily accelerating the last 5 months reaching a 3-year high in June at 65.7. This report, which can be very volatile, tracks both the non-manufacturing and manufacturing sectors of the Chicago-area economy.


Pending Home Sales Index for June

Consensus Forecast, Month-to-Month Change: 0.9%

Consensus Range: 0.3% to 1.5%


Pending sales have fallen for 3 months in a row, correctly telegraphing what has been a soft patch for existing home sales. Forecasters are calling for a strong 0.9 percent bounce back for June's data.


Dallas Fed General Activity Index for July

Consensus Forecast: 13.8

Consensus Range: 12.0 to 14.1


Dallas Fed manufacturing, in line with other regional reports, has been posting very strong rates of growth this year with forecasters seeing a slight and welcome cooling in July. The general activity index is seen coming in at 13.8 vs 15.0 in June.




Total Unit Vehicle Sales for July

Consensus Forecast, Annualized Rate: 16.8 million

Consensus Range: 16.5 to 17.3 million


Unit vehicle sales have been soft, missing Econoday's consensus each month this year. The consensus for July is an increase to a 16.8 million annualized rate from June's 16.6 million. These numbers will offer the first solid hints on how strong consumer spending was in July.


Personal Income for June

Consensus Forecast, Month-to-Month Change: 0.4%

Consensus Range: 0.2% to 0.5%


Consumer Spending

Consensus Forecast, Month-to-Month Change: 0.1%

Consensus Range: 0.0% to 0.3%


PCE Price Index

Consensus Forecast, Month-to-Month Change: 0.0%

Consensus Range: 0.0% to 0.0%


PCE Price Index

Consensus Forecast, Year-on-Year Change: 1.3%

Consensus Range: 1.3% to 1.4%


Core PCE Price Index

Consensus Forecast, Month-to-Month Change: 0.1%

Consensus Range: 0.1% to 0.2%


Core PCE Price Index

Consensus Forecast, Year-on-Year Change: 1.4%

Consensus Range: 1.4% to 1.5%


Personal income in June is expected to rise a respectable 0.4 percent for a second month in a row. Consumer spending, however, is seen up only 0.1 percent in what would also be a back-to-back repeat. Price data are not expected to improve with the PCE price index seen unchanged and the year-on-year rate down slightly to 1.3 percent. The consensus for the core PCE (less food & energy) is a monthly 0.1 percent increase for a yearly 1.4 percent. Note that the report will offer a July breakdown of consumer data already bundled in the second-quarter GDP report.


PMI Manufacturing for July, Final

Consensus Forecast: 53.2

Consensus Range: 51.9 to 53.2


July's PMI manufacturing final is expected to hold onto the improvement at the mid-month flash, repeating the moderate 53.2 result. New orders, output, and employment were also pluses in the flash report.


ISM Manufacturing Index for July

Consensus Forecast: 56.4

Consensus Range: 55.0 to 57.5


The ISM manufacturing index has been very strong this year, jumping back to the high 50s to a 57.8 reading in June that included unusual acceleration for new orders and strong growth in backlogs. Forecasters are calling for a little less strength in July, at a consensus 56.4.


Construction Spending for June

Consensus Forecast, Month-to-Month Change: 0.5% 

Consensus Range: 0.2% to 1.0%


Construction spending in June is expected to post its first increase since March, at a consensus 0.5 percent. Residential spending has been softening and related data proved unusually weak in the second-quarter GDP report. Nonresidential investment was a highlight of the GDP report but spending in this report has also been slowing.




ADP, Private Payrolls for July

Consensus Forecast: 175,000

Consensus Range: 151,000 to 195,000


ADP is on a losing streak and isn't likely to move markets no matter what its July estimate is. The Econoday consensus for July's ADP is 175,000 which matches the consensus for private payrolls in the employment report.




Initial Jobless Claims for July 29 week

Consensus Forecast: 244,000

Consensus Range: 235,000 to 247,000


The summer's auto retooling season hasn't disrupted weekly jobless claims which have been mostly steady at historic lows. Forecasters sees initial claims coming in unchanged at 244,000 in the July 29 week.


PMI Services for July, Final

Consensus Forecast: 54.2

Consensus Range: 54.0 to 56.8


PMI services rose more than 1 point in the July flash to 54.2, which is the level where forecasters see the index holding. A highlight of the flash report was strength in new orders which hit a 2-1/2 year high. Output and employment were also strong.


Factory Orders for June

Consensus Forecast, Month-to-Month Change: 2.6%

Consensus Range: 0.9% to 3.3%


Factory orders are expected to rise 2.6 percent in June following back-to-back declines of 0.8 and 0.3 percent in May and April. Strength in the advance data on the durables half of this report, up a giant 6.5 percent on an upswing in aircraft orders, will be diluted by flatter results for nondurable goods where prices are weak.


ISM Non-Manufacturing Index for July

Consensus Forecast: 56.9

Consensus Range: 55.0 to 57.6


ISM non-manufacturing has been one of the easiest indicators to forecast, coming in consistently at elevated levels. Both new orders and backlog orders in the June report were very strong and will contribute to production and also employment in July.  Forecasters see only marginal slowing, to a consensus 56.9 from June's 57.4.




Nonfarm Payrolls for July

Consensus Forecast: 180,000

Consensus Range: 144,000 to 220,000


Unemployment Rate

Consensus Forecast: 4.3%

Consensus Range: 4.3% to 4.4%


Private Payrolls 

Consensus Forecast: 175,000

Consensus Range: 151,000 to 205,000


Manufacturing Payrolls 

Consensus Forecast: 5,000

Consensus Range: -3,000 to 10,000


Average Hourly Earnings

Consensus Forecast, Month-to-Month Change: 0.3%

Consensus Range: 0.2% to 0.4%


Average Hourly Earnings

Consensus Forecast, Year-on-Year Change: 2.5%

Consensus Range: 2.4% to 2.6%


Average Workweek

Consensus Forecast: 34.5 hours

Consensus Range: 34.4 to 34.5 hours


After rising a strong 222,000 in July, nonfarm payroll growth is expected to slow back to trend under 200,000, to a consensus 180,000 in July. The unemployment rate is seen tightening one notch to 4.3 percent and average hourly earnings, which slowed to only 0.2 percent in June, are expected to move back to a 0.3 percent monthly gain. Year-on-year earnings are seen unchanged at 2.5 percent. Other calls are for a 175,000 rise in private payrolls, a modest 5,000 gain for manufacturing payrolls, and no change in the workweek at 34.5 hours.


International Trade Balance for June

Consensus Forecast: -$44.5 billion

Consensus Range: -$47.0 to -$43.9 billion


Forecasters see the international trade gap for goods and services narrowing to a consensus $44.5 billion in June from $46.5 billion in May. This would be in line with advance data on the goods part of this report which, reflecting strong May exports, narrowed sharply.


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