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Last week’s economic updates touched on a variety of economic sectors. Highlights included better-than-expected results for personal income and spending in June, as well as improved consumer confidence in July. This week will be packed with updates once again, with the focus on July’s business confidence and employment reports.
Last Week’s News
On Tuesday, the preliminary estimate of the June durable goods orders report was released. Durable goods orders increased by 0.8 percent during the month, in a result below economist expectations for a 2.2 percent rise. Still, as the report upwardly revised May’s durable goods orders growth from 2.3 percent to 3.2 percent, the miss against June expectations is better than it looks at first glance. Core durable goods orders, which strip out the impact of volatile transportation orders, increased by 0.3 percent in June, following an upwardly revised 0.5 percent increase in May. Notably, the June report marks four straight months with core durable goods order growth, which is an encouraging sign for business spending. The continued growth in both headline and core orders was especially impressive given that overall orders have already passed pre-pandemic levels. Looking forward, high levels of business confidence are expected to support additional durable goods orders growth.
Tuesday also saw the release of the Conference Board Consumer Confidence Index for July. This widely followed measure of consumer confidence increased by more than expected, moving from an upwardly revised 128.9 in June to 129.1 in July against calls for a decline to 123.9. This result brought the index to its highest level since the start of the pandemic. It also marks six consecutive months with improving confidence, showing that gains on the public health front and reopening efforts have boosted consumer sentiment throughout the year. In a notable area of strength, the report also showed that the share of respondents citing plentiful jobs hit a 21-year high in July. Overall, this encouraging report signaled continued high levels of consumer confidence, which should help sustain consumer spending growth.
On Wednesday, the FOMC rate decision from the Fed’s July meeting was released. The Fed cut rates to virtually zero last year in response to the pandemic, and there were no changes to rates at this meeting, as expected. The major focus was on the Fed’s press release and Fed Chairman Jerome Powell’s post-meeting press conference. Currently, the Fed is purchasing $120 billion in Treasury and mortgage-related bonds a month, and the July meeting did not change this pace of purchases. With that said, the press release noted additional progress toward the Fed’s dual mandate of maximum employment and long-term inflation at 2 percent. This could be a hint the Fed is considering future tapering of asset purchases. Given the improving economic fundamentals, economists expect to see discussion on the potential timing of a tapering initiative at upcoming Fed meetings. Still, to limit potential market volatility, we can expect any change to the asset purchasing program to be communicated well in advance.
On Thursday, the advance report of annualized GDP growth in the second quarter was released. During the quarter, the economy grew at an annualized rate of 6.5 percent. This result marks an increase from the downwardly revised 6.3 percent annualized growth rate we saw in the first quarter, but is below expectations for an 8.4 percent annualized growth rate. This miss against expectations was primarily due to headwinds from international trade and declining business inventories, which combined to take roughly 1.5 percent off the overall growth rate in the second quarter. The silver lining from the report was personal consumption, which increased by 11.8 percent on an annualized basis during the quarter. The forecasts were for a more modest 10.5 percent growth rate. The report represents the second-best quarter for personal consumption growth since 1952, signaling that high consumer saving levels have continued to support spending growth. So, although overall economic growth missed against expectations, the strong personal consumption growth is a good sign for the overall health of the economic recovery.
Thursday also saw the release of the initial jobless claims report for the week ending July 24. The number of initial unemployment claims fell from an upwardly revised 424,000 the week before to 400,000, against calls for a further decline to 385,000. Initial claims can be volatile on a week-to-week basis, however. Accordingly, this decline following a surprise increase in claims the week before is an encouraging sign that the labor market recovery remains on track. Throughout the course of the year, driven by public health improvements and nationwide reopening efforts, we’ve made notable progress in getting the pace of initial claims down. Looking forward, continued progress remains the most likely outcome. Still, because rising medical risks from the Delta variant could slow improvements, the situation should therefore be monitored. Overall, this encouraging report indicates strong levels of job growth in July despite the miss against expectations.
Friday saw the release of the personal income and personal spending reports for June. Personal spending came in above expectations, increasing by 1 percent against calls for a 0.7 percent increase. The result was driven in large part by increased spending on services, as nationwide reopening efforts allowed consumers to spend more on dining out and travel. Marking four straight months with increased service spending, this encouraging reports signals that consumer demand remains robust. Throughout the pandemic, as federal stimulus payments caused large swings in income, personal income has been very volatile on a month-to-month basis. In June, personal income increased by 0.1 percent, in a result above economist estimates for a 0.3 percent decline. The increase was largely due to rising wage income, which was supported by the reopening efforts and short supply of potential workers. Given the high levels of consumer confidence and the continuing economic recovery, both spending and income are expected to show continued improvement in the months ahead.
What to Look Forward To
On Monday, the ISM Manufacturing index for July was released. This widely monitored gauge of manufacturer confidence declined modestly, falling from 60.6 in June to 59.5 in July against forecasts for an increase to 61. As this is a diffusion index, where values above 50 indicate expansion, the result demonstrates continued strength in manufacturer production despite the miss against expectations. Supply constraints remained a headwind for production growth in July, as order backlogs increased. Rising material costs, tangled supply chains, and labor shortages have negatively affected manufacturers over the past few months. Nonetheless, throughout the year, high levels of consumer demand have supported increased output. In addition, the July report showed a welcome pickup in manufacturing employment, demonstrating that manufacturers succeeded in finding workers to address the high levels of consumer demand. Overall, this report was relatively encouraging, signaling continued growth despite the headwinds facing the manufacturing sector.
Wednesday will see the release of the ISM Services index for July. Service sector confidence is expected to show modest improvement, as economist forecasts call for the index to rise from 60.1 in June to 60.5 in July. This is another diffusion index, where values above 50 indicate expansion. So, if estimates hold, the result would demonstrate accelerated growth during the month. The service sector accounts for the lion’s share of economic activity in the U.S., so any improvement for the index would be an encouraging sign for the overall economic recovery. As was the case with manufacturer confidence, service sector confidence has remained in expansionary territory and well above pre-pandemic levels since June of last year. This indicates that businesses across industry sectors remain confident and willing to spend.
On Thursday, the June international trade report is set to be released. Economists expect to see the trade deficit widen from $71.2 billion in May to $73.0 billion in June. If estimates hold, this report would bring the deficit to its second-widest level on record, trailing only the $75 billion deficit recorded in March of this year. The advance trade report on the trade of goods showed a 0.3 percent increase in goods exports in June, but a 1.5 percent increase in the import of goods was more than enough to offset the modest export growth. High levels of domestic consumer demand have driven a surge in imports throughout the year, which has weighed on overall economic growth. With that said, the continued global economic recovery is expected to serve as a tailwind for further export growth and recovery.
Thursday will also see the release of the initial jobless claims report for the week ending July 31. Economist forecasts call for the initial claims to decline from 400,000 the week before to 378,000. If the estimates prove accurate, this report will mark the fewest number of initial claims in three weeks. It would also bring the number of claims close to the post-pandemic low of 368,000 set during the week ending July 9. Still, although notable progress has been made in reducing claims compared with data from earlier in the year, the pace of improvement slowed in June and July. Concerns about the Delta variant may be playing a part in the slowdown. But, given the volatile nature of weekly initial unemployment claims, it’s too early to tell if the rising medical risks have negatively affected the labor market recovery. If claims decline to end July, this report will indicate that the labor market recovery continues.
Speaking of the labor market recovery, we’ll finish the week with Friday’s release of the July employment report. Economists expect to see 900,000 jobs added during the month, in a step up from the 850,000 jobs added in June. If estimates hold, this report would represent the greatest number of jobs added during a month since August 2020. It would also mark seven straight months of job growth. Following accelerated hiring in June, growth in July would be an encouraging sign that reopening efforts are continuing to boost the labor market. The underlying data should also improve for the month. The unemployment rate is set to fall from 5.9 percent in June to 5.6 percent in July, and year-over-year growth for average hourly earnings should increase from 3.6 percent to 3.9 percent. If estimates prove accurate, they would signal that the labor market recovery continued to pick up steam to start the second half of the year.
That’s it for this week—thanks for reading!
