The Independent Market Observer

Monday Update: Despite Recent Strong News, GDP Growth Disappoints

Posted by Brad McMillan, CFA®, CFP®

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This entry was posted on Aug 1, 2016 3:13:42 PM

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monday updateLast week’s data showed that, although consumers continue to work and spend, business remains a weak point for the economy. Consumer news continued to surprise to the upside, but weak durable goods orders suggested that the industrial sector hasn’t stabilized yet. Lackluster business activity also led to a substantial disappointment in overall economic growth for the first half of the year.

Overall, though current conditions remain favorable, the first-half data indicates that the economic slowdown was deeper and longer lasting than expected.

A look at last week’s data

Consumers still confident and spending. The Conference Board’s Consumer Confidence Index was expected to decline from 98.0 to 95.5 in July, but it actually fell by much less, to 97.3, despite the turmoil around the British vote to exit the European Union. Consumers’ opinions on present conditions actually improved, although expectations moved lower. The small overall downward adjustment most likely reflects the fact that, since the Brexit vote, U.S. markets have rallied to new highs and employment continues to grow. The result suggests that consumer confidence is holding up and that Americans will continue to spend.

In addition, new home sales rose more than expected, from 551,000 (revised up to 572,000) to 592,000, keeping sales at their highest level since February 2008. This strong data points to an improving trend and a steadily improving housing market; given the long-term nature of a house purchase, it also speaks to continued consumer confidence.

Business neither confident nor spending. In contrast with the positive consumer news, durable goods orders disappointed once more. Headline orders declined by 4 percent, much worse than expectations of a 1.4-percent drop, and also worse than the previous month’s decline of 2.3 percent. As expected, the downside risk here came from a decline in aircraft orders, but this series is very volatile because of that component, and such a decline is not necessarily a cause for concern. The core orders index, which excludes transportation, is a more reliable indicator, and it also disappointed on a smaller scale, declining by 0.5 percent—down from the previous month’s decline of 0.3 percent and well under expectations for a gain of 0.3 percent. This weak results suggests the industrial sector has not yet stabilized.

Fed feeling more confident. The regular meeting of the Federal Reserve concluded on Wednesday, and, as expected, there was no action on interest rates. Interestingly, the Fed's statement was more positive about the U.S. economy than expected and did not mention international risk. Markets interpreted the statement as marginally increasing the chance of interest rate increases this year.

Growth much slower than thought. That interpretation was dashed by the Friday release of the initial estimate of U.S. economic growth in the second quarter. GDP growth was expected to rise from 1.1 percent in the first quarter to 2.6 percent in the second, but it grew by only 1.2 percent. And a downward revision to the first quarter, from 1.1 percent to 0.8 percent, didn’t help matters. Coming despite the largest gains in consumption in the past decade and a small gain in exports over imports, the poor result was driven by continued weakness in business investment, residential investment, and especially inventory adjustments.

The week ahead

This week, we’ll see a wide range of data, which should help us determine whether the poor results from the first half of the year are likely to continue.

This morning, the ISM Manufacturing Index offered insight into recent poor durable goods orders. With only a slight decline to 52.6 from 53.0, the result suggests that stabilization is likely to continue, despite the weak data last week. New orders remained strong, and the production index actually rose slightly. Overall, this indicator continues to show that the sector is leveling out.

On Tuesday, the release of personal income and spending data for June should show that consumers remain able and willing to spend. Income growth is expected to tick up from 0.2 percent to 0.3 percent, and spending growth to tick down from 0.4 percent to 0.3 percent. All of these are healthy numbers, and core spending is expected to do even better, with a 0.5-percent gain, indicating that the consumer should continue to be the major engine for the economy.

On Wednesday, the ISM Non-Manufacturing Index will offer a look at the service sector. The expected small decline, from 56.5 to 56.0, would still leave the index at 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. Because it's the largest part of the economy, positive news from the service sector should help boost growth.

The most important release next week will be Friday’s employment report. Job growth is expected to be reasonably strong at 180,000—down from last month’s blowout number of 287,000 but still at a healthy level. The unemployment rate should tick down, from 4.9 percent to 4.8 percent, and average hourly earnings growth is expected to accelerate slightly, from a gain of 0.1 percent to 0.2 percent. Overall, if expectations are met, this report would signal ongoing improvement in the labor market, supporting continued consumer confidence and spending growth.

Have a great week!

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