Monday Update (on Tuesday): Growth Continues, Signs of Slowing Mount

Posted by Brad McMillan, CFA, CAIA, MAI

This entry was posted on Jul 3, 2018 12:19:57 PM

and tagged In the News

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Monday updateLast week started with some good news on the housing front. This week, we’ll see reports coming in that cover the whole economy.

Last week’s news

The new home sales report, released on Monday, came in better than expected. The annualized monthly sales in May were up to 689,000 from 662,000 in April. This was both the largest gain and the highest level in six months. It was also well above the expected 667,000 figure. The increased activity suggests housing demand continues to be healthy despite the concerns raised by the prior week’s data.

On Tuesday, the Conference Board released its consumer confidence survey. The survey pulled back by slightly more than expected, from 128.8 to 126.4. Although this is still a high level, it is the third decline in the past four months. The drop was largely due to a pullback in the expectations index. Nonetheless, the continued high level suggests that consumer demand is likely to keep growing in the short term. But concerns are rising about the longer term.

On Wednesday, the durable goods orders report gave the same result for business investment. The headline index, which includes transportation and is heavily influenced by aircraft orders, improved by somewhat more than expected. It went from a very weak decline of 1.6 percent in April to a still weak decline of 0.6 percent for May, largely on trends in aircraft orders. The core index, which excludes transportation and is a much better economic indicator, actually did worse for the month. Here, growth pulled back from an upwardly revised and very strong level of 1.9 percent in April to a decline of 0.3 percent in May; this result was well below the expected 0.5-percent growth. Although the quarter as a whole looks strong, given the big upward revision in April, the current data looks weaker.

On Friday, the personal income and spending report also gave some concern about the consumer. Personal income growth rose as expected to 0.4 percent in May, although April was revised downward from 0.3-percent growth to 0.2-percent growth. Personal spending growth dropped further than expected—from a downwardly revised 0.5 percent in April to 0.2 percent in May, below expectations of 0.4-percent growth. We already know that retail spending growth was strong in May, but weaker auto sales apparently pull the overall figure back. Both of these numbers indicate positive continued economic growth. Still, the miss on expectations may be another sign of slower growth ahead.

What to look forward to

On Monday, the Institute for Supply Management (ISM) Manufacturing index was released. It beat expectations, rising to 60.2 for June from 58.7 in May. This is a diffusion index, where values above 50 indicate expansion and below 50 indicate contraction. The rise leaves the index at a very healthy level and should be positive for growth. This result is especially positive in light of the stronger U.S. dollar, which hurts manufacturers, as well as the increasing trade conflicts.

On Thursday, the ISM Nonmanufacturing index will be released; it is expected to pull back slightly, from 58.6 in May to 58 in June. There may be some upside risk here, however, with retail sales and consumer spending doing well in response to tax cuts and high consumer confidence. But even with this slight pullback, the index would remain at a healthy expansionary level.

Also on Thursday, the Federal Reserve will release the minutes from its June meeting. While there seemed to be a modest hawkish shift in the meeting statement, the minutes will provide insight into just how confident members are in their growth projections. The markets will be looking for details about the likely rate increases.

On Friday, the international trade report is expected to show a slight decline in the trade deficit from $46.2 billion in April to $45.4 billion in May. The deficit in traded goods declined significantly on strong export growth last month, so there may be potential for a positive surprise. If so, net exports could contribute meaningfully to second-quarter growth.

Also on Friday, the employment report is expected to show a decrease in job growth from 223,000 in May to a still strong 198,000 in June. Unemployment is expected to stay steady at 3.8 percent—the lowest level in decades. Growth in average earnings is also expected to remain solid at a healthy 0.3 percent, which would take the annual rate back up to 2.8 percent. While there may be some downside risk to the job creation numbers, if the report comes even close to expectations, it will mean good things for continued economic growth.

Have a great week!

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