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Despite a recent run of weak data indicating a summer slowdown, positive surprises across the board last week suggest that growth is likely to continue for the rest of the year. Business sentiment rose further into positive territory, while job growth was much stronger than expected. Overall, the big picture looks positive, as businesses continue to feel good and to act on it by hiring.
A look at last week’s data
Last week was a busy one, with data across the economy. On Monday, the ISM Manufacturing Index beat expectations by rising from 54.9 to 57.8, well above expectations of 55.0. This is a diffusion index, with numbers above 50 indicating expansion. As such, this is a very healthy result—the highest in almost three years—and was broadly based. The decline in the dollar and the strengthening of global growth have helped U.S. manufacturing and are likely to continue to do so.
On Wednesday, the Federal Open Market Committee released the minutes of its last meeting, although new information was limited. It did provide some details on plans to shrink the Fed’s balance sheet, but not a starting date. Low inflation was also mentioned, if only to dismiss it for the moment. Overall, as expected, there was little in the way of real news.
The international trade report, released on Thursday, showed that the trade deficit narrowed slightly, from $47.6 billion to $46.5 billion, on a modest rise in exports combined with a drop in imports. This decrease was slightly less than expected. It was enough of an improvement, however, that trade should be either roughly neutral or a small drag for the economy as a whole in the second quarter, down from a modest positive result in the first quarter.
We also saw the release of the ISM Non-Manufacturing Index on Thursday. It, too, surprised to the upside, rising from 56.9 to 57.4—close to a two-year high and against an expected decline to 56.5. The rise was broad based, with 16 of 17 industries expanding. With both manufacturing and service sector surveys beating expectations, and remaining high in expansion territory, business confidence is a positive sign for growth in the rest of the year.
Finally, on Friday, the employment report also beat expectations—and by a lot! Job growth was up to 222,000 in June from 138,000 in May, and well above expectations of 180,000. From a labor demand perspective, the data was even stronger: the average workweek rose from 34.4 hours to 34.5 hours, which is significant across the labor force as a whole. The household survey showed people moving back into the labor force, driving the unemployment level up to 4.4 percent from 4.3 percent, which is still a very low level. Wage growth rose, as expected, from 0.1 percent in May to 0.2 percent in June.
Although strong, this report probably reflects some bounce back from the weak May numbers. Nevertheless, this is one more positive sign for the economy moving forward.
What to look forward to
This week will provide a good look at the economy as a whole. On Wednesday, Federal Reserve Chair Janet Yellen will give her semiannual testimony to Congress. Her prepared testimony will be released in the morning. This will be followed by a question-and-answer session with members of Congress. Expected topics include the Fed’s commitment to its interest rate projections, the start date of the balance sheet drawdown, and, quite possibly, Yellen’s interest in another term as Fed chair. As far as the economy goes, her comments should echo the most recent meeting minutes, so few surprises are expected.
The remaining economic data releases of note will all come on Friday. Consumer Price Index data for June will be watched closely. Since March, inflation has come in below expectations and is nearing a two-year low. If June brings more of the same, it could start to affect Fed policy decisions. Consensus expectations are low, at 0.1 percent for headline inflation and 0.2 percent for core inflation, which excludes the more volatile food and energy prices.
The retail sales report should give us an idea of whether spending growth will start to catch up with rising consumer income. Core retail sales—which exclude food, gas, building materials, and autos—are expected to grow 0.3 percent in June, up from flat in May. Expectations for the headline number are much lower, based on a drop in both gasoline prices and auto sales. These are not great numbers, but if they come in as expected, they would moderate concerns about a slowdown.
The industrial production report—a measure of output at factories, mines, and utilities—is expected to show growth of 0.3 percent, along with a 0.2-percent rise in manufacturing output. The headline growth number includes strong utility growth due to warm weather around the country, so it could provide some upside risk. On the other hand, it also suggests that the manufacturing number may be a more accurate indicator of the health of the economy as a whole.
Have a great week!
