Bob’s Journal for 8/1

The U.S. economy slowed in the second quarter, but there are signs that growth is increasing in the third quarter.

Last week’s gross domestic product (GDP) report for the second quarter shook many people and was said to increase the case for the Federal Reserve’s interest rate cut this week. It is important to remember, however, that GDP is backward-looking and doesn’t tell us anything we shouldn’t have already known.

Growth in the second quarter slipped to 2.1% in this first estimate, sliding from 3.1% in the first quarter. In addition to being disappointed by the headline number, many people were surprised by the extent to which growth relied on consumers and households.

Household spending provided most of the growth in the second quarter. Strength in households shouldn’t be a surprise. Wages and other income sources have been increasing at much higher rates than they had at earlier moments during this expansion. The low unemployment rate as well as very high levels of consumer confidence support, strong consumer spending, along with rising prices for stocks and homes all played a role.

In contrast, business investment declined. The decline wasn’t significant at 0.6%. But it ended a streak of higher business investments. The decline shouldn’t have been a surprise based on the manufacturing surveys and data we saw in the second quarter. Nevertheless, it raised concerns for a lot of investors and increased expectations for strong action by the Fed.

Yet, there are a lot of reasons to believe the decline in business investment is turning around.

A significant part, if not all, of the decline in business investment and manufacturing was caused by weak exports. Two factors caused weak exports: trade conflicts and weak growth outside the United States. The trade conflicts appear to be on the back burner until the 2020 election. While that could change at any time, for now, tensions aren’t escalating.

In addition, growth is improving in some key U.S. trading partners. With major central banks initiating a new round of easy money, global growth should continue improving. The big question mark here is Europe, especially Italy.

I don’t expect a big surge in exports from these factors. It is likely, however, that exports will improve and make a positive contribution to growth. Improvements in exports also should cause business investment to increase a bit.

The recent data indicate that both exports and business investment are already improving. Once again, I don’t see a big surge in growth, but it looks like the major negative factors in the second quarter GDP will improve. Thus, we’re likely to see 2% or better growth for at least another quarter or two quarters.

The Data

Consumer Confidence, as measured by the Conference Board, was much higher in July, rising to 135.7 from 124.3 in June. The June reading was a 52-week low, while the July reading is just below the cycle high level of 137.9 in October 2018. A significant rise in expectations was a key reason for the increase. This reading makes The Conference Board measure more consistent with the University of Michigan Consumer Sentiment Index, which has had higher readings for a few months.

In the Personal Income and Outlays report, income increased 0.4% in June, matching a revised 0.4% increase in May. Wages and salaries increased 0.5% and the savings rate is up to 8.1%.

Spending growth declined, however, to 0.3% from a revised 0.5%.

Inflation still is low, with the PCE Price Index rising only 0.1% for the month and the Core PCE Price Index rising 0.2%. Over 12 months, the indexes are up 1.4% and 1.6%, respectively.

Pending home sales surged 2.8% in June following a 1.1% increase in May. Over 12 months, sales are up only 1.6%.

Home price increases continue to slow. The Corelogic S&P Case-Shiller Home Price Index increased 0.1% in May. It is up only 2.4% over 12 months to reach its lowest rate in seven years.

The Kansas City Fed Manufacturing Index was reported as a negative one for July compared to zero for June. The components of the index were mixed. Expectations for the next six months were positive, but they were at their lowest level in 12 months.

But the Dallas Fed Manufacturing Survey showed some improvement in July. The General Activity Index rose to negative 6.3 from negative 12.1. The Production Index rose to 9.3 from 8.9 in June. Though they improved, both measures were below expectations.

Of the recent Fed surveys, Empire State and Philadelphia were better than expected, while Dallas, Richmond and Kansas City were below expectations.

The ISM Manufacturing Index for July indicates growth slowed a little in the sector but still is climbing. The index was reported at 51.2, compared to 51.7 in June.

The PMI Manufacturing Index, which isn’t as broad-based, indicates the sector is barely growing. The index was reported as 50.4 for July, compared to 50.6 in June.

The Chicago Purchasing Managers Index for July tumbled to 44.4 following a 49.7 reading in June. That’s the lowest level since December 2015, and many components of the index were at multi-year lows. Readings below 50.0 indicate a contraction.

Preliminary reports indicate Friday’s Employment Situation reports should continue to reflect a strong labor market. The ADP Employment Report found out that 156,000 private sector jobs were created in July, compared to 112,000 in June.

New unemployment claims increased 8,000 to 215,000. That’s still close to the 50-year low of 193,000 recorded in April. The four-week average claim is only 211,500.

As discussed above, the first estimate of GDP for the first quarter was 2.1%, down from 3.1% in the first quarter and household spending provided almost all the growth.

The Markets

The S&P 500 fell 1.33% for the week that ended with Wednesday’s close. The Dow Jones Industrial Average declined 1.50%. The Russell 2000 dropped 0.45%. The All-Country World Index (excluding U.S. stocks) gave up 2.38%. Emerging market equities tumbled 2.84%.

Long-term treasuries rose 0.83% for the week. Investment-grade bonds fell 0.19%. Treasury Inflation-Protected Securities (TIPS) declined 0.02%. High-yield bonds lost 0.20%.

The dollar increased 1.02%.

Energy-based commodities rose 0.58%. Broader-based commodities fell 0.99%. Gold lost 0.73%.

Bob’s News & Updates

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