Monday Update: Better U.S. Economic Data Points to Continuing Recovery

After discouraging news the week before, last week’s U.S. economic data came in generally positive, suggesting that the economy continues to move forward despite ongoing headwinds.

The Housing Market

Housing news was encouraging overall:

• Prices were up by 0.4 percent month-over-month per the Federal Housing Finance Agency’s House Price Index, with the prior month’s increase revised up from 0.3 percent to 0.4 percent.
• Existing home sales jumped by 3.2 percent, from 5.32 million to 5.49 million, well above the expected gain of 0.9 percent. The prior month’s gain of 5.1 percent was revised down to a still very healthy 4.5 percent.
• Mortgage applications ticked up by 0.1 percent after the prior month’s decline of 1.9 percent, apparently due to a rise in rates.

The only disappointment was new home sales, which dropped by 6.8 percent to 482,000, down from a downward-revised 517,000 in the prior month. The number was well below expectations of 548,000, but the shortfall seemed largely due to a lack of supply of new homes rather than a decline in demand.

Business Expectations

Surveys released last week showed slight improvements in business expectations:

• The Chicago Fed National Activity Index moved back into positive territory, at 0.08, up from −0.08 in the prior month, which itself was revised upward from –0.17. This figure also came in well above expectations of −0.05, suggesting that business activity continues to improve around the country.
• The Markit Purchasing Managers’ Index also ticked up, from 53.6 to 53.8, indicating slightly faster expansion in the U.S. manufacturing sector.  
• Bigger picture, the Conference Board’s Leading Economic Index also continued to rise. The 0.6-percent increase was down slightly from the prior month, at 0.7 percent, but handily beat expectations of 0.3 percent.

Consumers and Employment

The good news was that initial claims for unemployment insurance dropped to 255,000, a 41-year low. This suggests that companies continue to hang on to existing employees for fear they will be difficult to replace—a sign of strength in the labor market. As a proportion of the labor force, the initial jobless claims figure was even more impressive.

On the downside, the Bloomberg Consumer Comfort Index ticked down slightly, despite continuing strength in employment.

The Week Ahead

Monday: The Durable Goods Report released this morning had bad news for the past quarter but was more encouraging for the future. 

• The headline number was inflated by aircraft orders but still beat expectations.
• The more important core orders, excluding transportation, also came in well above expectations, gaining 0.8 percent against expectations of 0.4 percent.
• Nondefense capital goods orders, a decent proxy for business investment, did even better at 0.9 percent, but actual shipments were down 0.1 percent for the month and 0.9 percent for the quarter, confirming recent weakness while suggesting a pending recovery.

Tuesday: The Conference Board’s Consumer Confidence Index is expected to decline a bit in the face of higher gasoline prices while remaining well above long-term averages.

Wednesday: The Federal Reserve’s regular meeting ends. No news of consequence is expected, with the main question being whether and how hard the Fed will hint at a September rate increase.

Thursday: The initial estimate of second-quarter GDP growth will be released. After the first quarter’s loss, expectations are for GDP growth of around 2.5 percent annualized for Q2, with a possibility of even better results.

Friday: The Bureau of Labor Statistics will release the Employment Cost Index, which should offer valuable insight into whether the next stage of the recovery is approaching.

We'll also be keeping an eye on the U.S. stock market, which had a significant drop on Friday and enters the week on the tail of an 8.5-percent decline in the Shanghai Composite Index. Initial results are negative, with U.S. markets down a bit further, but so far this seems to be a measured response.