Monday Update: Slowdown Starts to Speed Up

Last week was a good one for the economy. The data released met expectations and, in many cases, substantially exceeded them. Overall, accelerating growth seems likely in the second half of the year, and first-half growth may turn out better than the initial reports suggested. 

Consumer Income and Spending

Personal income and spending data for June were released on Monday: 

• 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. Supporting this is a further small decline in the Bloomberg Consumer Comfort Index, which dropped from 40.5 to 40.3.

The exception was car sales, with Ward’s vehicle sales reports coming in well over expectations at 17.46 million total sales, a high level. Improvements in auto sales are often harbingers of faster future growth.

Employment and Business

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. 

As important as the manufacturing index is, it represents a relatively small part of the economy. The service sector is a much larger factor, and the ISM Non-Manufacturing Index surprised to the upside, posting the best result since its creation in 2008. Subindices did even better: business activity was the highest since December 2004, and employment and new orders hit highs not seen since August 2005. The survey shows that conditions are not, from a business perspective, nearly as bad as more focused numbers might suggest. In fact, in many areas, we’re moving back to the peak levels of the mid-2000s.

The employment report, released on Friday, confirmed this. While not as surprisingly strong as the ISM survey, job growth was right in line with expectations. 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.

The details:

• Job creation fell slightly below expectations, at 215,000, but prior months were revised upward by 14,000, making up the difference and more. Historically, upward revisions have also been a sign of continued improvement.
• Average weekly hours worked increased, indicating that labor demand was even stronger than the job creation number suggests—the equivalent of more than another 300,000 jobs, per Ned Davis Research.
• The underemployment rate dropped, suggesting that job gains are continuing to benefit those most in need of them.
• Manufacturing jobs also posted a gain of 15,000, well above the expected level, partially mitigating the slight decline in the ISM Manufacturing Index and suggesting that the industrial segment of the economy may be recovering along with the service sector.

 The Week Ahead

Three major reports will be released this week: retail sales, industrial production, and the University of Michigan’s Consumer Sentiment Index.

Thursday: After dropping last month by 0.3 percent as a whole and by 0.1 for the core data, retail sales are expected to recover, with growth around 0.5 percent and 0.4 percent, respectively. Analysts I follow expect the results to be even better—potentially much better, given the high level of car sales we saw this week. Even meeting expectations, however, would indicate continued strong spending and growth.

Friday: Industrial production is expected to post a small gain, with another increase of 0.2 percent, the same as the prior month. There are downside risks to this number, however, given the strong dollar and continuing decline in oil prices and drilling.

Finally, the University of Michigan Consumer Sentiment Index is expected to increase slightly. Given the changes in two other measures of consumer confidence, which I discussed last week, an increase would be a relief. The fact that the other measures have decreased, however, suggests that a surprise to the downside is quite possible.