Monday Update: Positive Surprises Across the Board

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Jul 5, 2016 2:24:31 PM

and tagged In the News

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monday updateLast week’s economic news offered several positive surprises. Consumer confidence improved and incomes also rose, indicating that Americans are both more willing and more able to spend. Manufacturing, the weakest part of the economy for some time, moved back to material growth levels, raising the hope that the sector is finally reviving.

A look at last week’s news

Consumers confident and spending. Despite the recent economic slowdown here in the U.S. and the risks abroad, the mood of American consumers actually picked up significantly. The Conference Board’s survey of consumer confidence came in at 98, its highest level since last October, up from the last reading of 92.6 and well above the expected result of 93.1. Present conditions and expectations both rose strongly.

The personal income and spending reports validated that increased confidence.

  • Income continued to grow, at a 0.2-percent rate—not bad but below expectations of 0.3-percent growth. This shortfall was offset by an upward revision to the April growth rate, from 0.4 percent to 0.5 percent.
  • Personal spending also pulled back, but in this case, it was from a massive 1-percent gain in April, which was revised up to an even better 1.1 percent. The current 0.4-percent gain represents a healthy growth level, in line with expectations. Combined, this is the best two-month growth pace in spending since 2009, which should support second-quarter economic growth.

Good news for manufacturing, finally. The ISM Manufacturing survey also surprised to the upside. Increasing to 53.2 from 51.3, it sharply beat expectations of an unchanged result, hitting its highest level since February 2015—another good omen for second-quarter growth. The details of the report were good, with essentially all components moving in a positive direction and 13 of 18 categories (72 percent) showing expansion. With the recent drop in the value of the dollar, this may be a sign that the manufacturing sector has turned around at last, which would be extremely good news.

Faster-than-estimated GDP growth. Last week also saw the final estimate of first-quarter U.S. economic growth, which was revised up further to 1.1 percent—more than twice the initial estimate of 0.5 percent. As it turns out, the first quarter wasn’t quite as bad as feared, and the second quarter is likely to be significantly better based on the most recent data.

The week ahead

This week’s data includes the release of the minutes from the latest Federal Open Market Committee meeting, the international trade balance report, the ISM survey of the service sector, and—the big one—the jobs report.

The FOMC minutes will be released on Wednesday and are unlikely to contain much news. Markets will be interested in why projected interest rates fell as much as they did and what that reveals about how the Fed sees risks evolving. Overall, though, there should be little news that would move markets, with the possible exception of any hint of a September rate increase.

Also slated for release on Wednesday, the international trade balance report is expected to show that U.S. exports dropped by a small amount while imports increased, widening the deficit. This should have a small negative effect on growth, but it has already been factored into estimates.

The final Wednesday report will be the ISM Non-Manufacturing survey, which covers the service sector. After falling to a two-year low of 52.9 in May, the index is expected to increase to 53.4, which would be positive but not significant. The index remains in expansion territory, however, and growing retail and service sales suggest it may be poised to push higher in coming months.

The major release of the week, the jobs report, will come out on Friday. After last month’s very poor result (38,000 jobs created), expectations are for a substantial rebound to 180,000. Average hours worked and average hourly earnings growth are expected to remain steady, at 34.4 and 0.2 percent respectively, as is the unemployment rate, at 4.7 percent. Part of the anticipated gain will come from the end of the Verizon strike, but this would still represent a return to healthy job growth, reducing risks to the economy going forward.

Have a great week!

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