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Last week’s data showed that, despite a small pullback from the previous month, business confidence remains positive across the board. Consumers also continued to demonstrate their confidence by spending. Finally, the jobs report came as a very positive surprise, suggesting that consumers are both willing and able to keep doing their bit for the economy.
Overall, the rebound from the weak first half continues to strengthen.
A look at last week’s news
Business remains confident. Last week, the Institute for Supply Management released its two key business surveys.
- The ISM Manufacturing Index declined slightly, to 52.6 from 53. Nonetheless, it remains at expansionary levels for the fifth month in a row, and 11 of 18 industries covered expanded. New orders remained strong, and the production index actually rose slightly. Overall, the report suggests that the sector will likely continue to stabilize, despite weak data from the prior week.
- The ISM Non-Manufacturing Index, which covers the service sector, also showed a small decline, from 56.5 to 55.5, slightly worse than expectations of 55.9 but still a strong growth level. The service sector continues to expand, with retail sales growth at a two-year high, but expectations may moderate going forward. Positive news from the service sector, the largest part of the business economy, should help boost growth.
Consumer spending continues strong. Income growth for June remained steady at 0.2 percent, below expectations for an increase to 0.3 percent. Spending growth stayed steady at 0.4 percent, beating expectations of an increase to 0.3 percent. Steady spending growth in the face of declining income growth drove savings rates down, but all remain at healthy levels. These figures show ongoing sustainable growth, and consumers should continue to be the major engine for the economy.
Employment report stellar. The most important data of the week was the July employment report.
- Job growth blew away expectations with an increase of 255,000, well above the anticipated 180,000—down from last month’s blowout number of 287,000 but still at a very healthy level.
- Average weekly hours worked went up, from 34.4 to 34.5, signaling even faster growth in labor demand.
- The unemployment rate remained steady at 4.9 percent, and the underemployment rate ticked up from 9.6 percent to 9.7 percent as people chose to move back into the labor force, bringing the participation rate up to 62.8 percent from 62.7 percent.
- Average hourly earnings growth beat expectations, increasing from a gain of 0.1 percent to 0.3 percent, and annual growth remained at 2.6 percent, one of the highest levels of the recovery.
Surprisingly, even the weakest employment cohort, workers with less than a high school education, showed substantial improvement, with the unemployment rate for this group dropping to 6.3 percent, the lowest since late 2006. Overall, the report suggests that slack in the labor market continues to lessen and should support continued consumer confidence and spending growth.
The week ahead
This week’s economic data will be limited. On Friday, the University of Michigan Consumer Sentiment Index is expected to tick up slightly, from 90 to 91.5, after a post-Brexit pullback, buoyed by new stock market highs and continued gains in house prices, along with declines in gasoline prices.
More important, the retail sales report on Friday is expected to show that confidence has translated into continued sales growth. Retail sales are expected to grow by 0.4 percent, down from 0.6 percent the previous month but still at a strong level. There is real upside risk to this number, based on strong auto sales. Removing the volatile auto and gasoline sectors, core retail sales are expected to increase by 0.2 percent. Although this figure would be down from recent trends, it is still a healthy increase. Overall, the report is expected to ratify continued consumer-led growth.
Have a great week!
