Monday Update: More Slow and Steady Growth

Slow but steady was the theme for last week. Although economic growth continues, the pace has not yet accelerated.

Despite some areas of concern, last week’s data was positive on the whole, showing continued moderate growth.

Federal Reserve Meeting

The highlight of the week was the release of the Federal Reserve’s post-meeting statement. As expected, there was no news of consequence. The committee made minor changes to the previous statement, suggesting that they see continuing growth in the economy.

The general takeaway: A September rate hike remains likely, the first step in the final stage of normalizing monetary policy.

Q2 Economic Growth

The Fed’s conclusions were supported by Thursday's release of the first estimate of second-quarter economic growth, reported at 2.3 percent of GDP. Although below the survey result of 2.5 percent, this outcome was well within the range. Combined with an increase in estimated growth for the first quarter, from −0.2 percent to 0.6 percent, economic growth for the first half of the year came in above expectations.

Among the positive news in the report:

• Consumer spending growth accelerated from 1.8 percent to 2.9 percent, suggesting that Americans are starting to open their wallets.
• Government spending grew from −0.1 percent to 0.8 percent—not a spectacular growth rate, but one that means government is now contributing to the economy rather than pulling it back.

These positive factors were offset by a large decline in business investment, from 8.6 percent down to 0.3 percent. The decline was widespread, with significant contributors including continued reductions in oil industry drilling and equipment purchases.

Looking ahead, although second-quarter growth wasn’t bad, consumer spending should continue to support faster growth, and business investment is likely to do better as the oil industry normalizes its spending. Growth in the second half of the year is very likely to exceed that of the first.

The Housing Market

The housing market continued its recovery and, in many respects, has now normalized.

• The S&P/Case-Shiller Home Price Index grew by 4.39 percent in May, at the lower end of the survey range but up from the previous month.
• Mortgage applications continued to recover, up by 0.8 percent from the previous reading, as reported by the Mortgage Bankers Association.
• Pending home sales pulled back in June, down 1.8 percent from the prior month, which was significantly worse than expectations, but continued to show strong longer-term growth.

Consumer Confidence and Employment

Several sets of consumer confidence data were released last week:

• The Conference Board’s measure dropped significantly for July, from 101.4 to 90.9, well below the survey, at 100, and the prior month, at 101.4. The decline appeared largely due to a mixture of rising gas prices, the crisis in Greece, and a pullback in the stock market.
• The Bloomberg Consumer Comfort Index also declined, from 42.4 to 40.5.
• Interestingly, the University of Michigan Consumer Sentiment Index showed a much smaller drop, from 93.3 to 93.1, suggesting that the large declines in the other surveys might not be as significant as they seem.

Consumer confidence data can bounce around, and the conflicting indicators, combined with other stronger signs in the economy, suggest this may just be monthly noise.

The one concerning report for the week was the Employment Cost Index, which measures how much workers are being paid. Widely expected to show further growth, the results for the second quarter came in at 0.2 percent, well below expectations of 0.6 percent and the prior quarter’s 0.7-percent increase. Wage growth is the missing link in the recovery, and the lack of growth here is worth watching.

The Week Ahead

Monday: Personal income and spending data for June were released today.

• Income growth increased by 0.4 percent, above expectations and in line with the prior month, which was revised upward.
• Spending growth was in line with expectations, at 0.2 percent, declining from the prior month’s 0.7-percent growth, which was revised down. The decline in spending growth is reasonable given the very high level of the previous month.

Overall, the data suggests that consumers continue to earn more but are reluctant to spend, slowing current growth but laying a strong foundation for future growth.

Meanwhile, the ISM Manufacturing Index came in at 52.7 for June, down slightly from the prior month’s 53.5 and somewhat below expectations. Given the strength of the dollar, this is reasonable and still represents growth, although at a slower rate.

Wednesday: The international trade balance will shed light on whether imports and exports are contributing to or detracting from growth. The trade balance is expected to widen slightly.

The ISM Non-Manufacturing Index will also be released, showing how service businesses expect the future to look. Expectations are for a small increase, suggesting continued growth.

Friday: This is the big one—the employment report for July. Expectations are for job growth of 225,000, with the unemployment rate remaining stable and average hourly earnings growth of 0.2 percent. This report will have a great deal of influence, as the Fed will be looking to it to help determine whether to raise rates in September. Some forecasters suggest actual growth might be higher than expectations.

Overall, the news on the economy continues to be positive, and the fundamentals remain strong. Consumer spending, in particular, remains well supported by job and income growth. Although we continue to face headwinds, the big picture remains one of sustainable growth.