|
The Fed’s unwinding intentions have been the market focus over the last two or three months. And the Fed has focused on the labor market. The employment situation report for July does not appear to give the Fed argument enough for any major policy move on quantitative easing immediately. However, that does not rule out telegraphing by the Fed of moves to come. Meanwhile, other economic news has been mixed.
 Stocks rose this past week largely on belief that the Fed is going to keep monetary policy easing for some time. However, the week started on the downside as pending home sales dipped. Tuesday, traders stood on the sidelines on the start of the Fed’s two-day policy meeting and equities were mostly little changed. At mid-week stocks were mixed but showed only modest change as the Fed held steady on policy rates and guidance, showing no preference for immediate change in bond buying programs, although leaving options open.
 Thursday, stocks rallied as traders focused on the Fed keeping its stimulus programs in place. Also, initial jobless claims dropped more than expected while both the Markit PMI and ISM manufacturing surveys beat expectations.
On Friday, stocks mostly edged up on the idea that bad news is good news regarding the Fed. Payroll employment for July posted softer than expected, leaving the view that the Fed will at most taper in the near term by token amounts.
Equities were up this past week. The Dow was up 0.6 percent; the S&P 500, up 1.1 percent; the Nasdaq, up 2.1 percent; the Russell 2000, up 1.1 percent; and the Wilshire 5000, up 1.2 percent.
Equities were up notably in July. The Dow was up 5.0 percent; the S&P 500, up 6.4 percent; the Nasdaq, up 8.4 percent; the Russell 2000, up 8.4 percent; and the Wilshire 5000, up 6.8 percent.
For the year-to-date, major indexes are up as follows: the Dow, up 19.5 percent; the S&P 500, up 19.9 percent; the Nasdaq, up 22.2 percent; the Russell 2000, up 24.8 percent; and the Wilshire 5000, up 21.1 percent.
Weekly percent change column reflects percent changes for all components except interest rates. Interest rate changes are reflected in simple differences.
 Treasury yields ended the week mixed although mostly slightly up. Rates nudged up Monday on worries that the Fed would give guidance toward early tapering at its Wednesday policy announcement. Rates were essentially unchanged Tuesday and Wednesday. The Fed on Wednesday basically held its cards close to its vest on pending cutting back on asset purchases, taking a very neutral position on when to reduce quantitative easing. A soft GDP report (combined new Q2 and revised down Q1) added to this view.
But worries about Fed taper returned Thursday on a dip in initial jobless claims and two moderately strong reports on manufacturing, bumping rates up. Rates swung down Friday on the disappointing jobs report for July.
For this past week Treasury rates were mixed but mostly up slightly as follows: 3-month T-bill, up 2 basis points; the 2-year note, down 1 basis point; the 5-year note, down 1 basis point; the 7-year note, up 1 basis point; the 10-year note, up 4 basis points; and the 30-year bond, up 7 basis points.
 The spot price of West Texas Intermediate gained moderately for the week with notable changes each day except for a quiet Monday. Crude declined over a dollar a barrel on Tuesday on indications of slowing in growth from a dip in pending home sales.
Spot WTI jumped $2 per barrel on Wednesday after a government report of inventories at Cushing hitting a 15-month low. Also, second quarter GDP growth beat expectations. Thursday, WTI rose more than $2-1/2 per barrel on healthy manufacturing numbers from Markit and ISM. At week’s end, crude dipped a dollar on the disappointing jobs report.
Net for the week, the spot price for West Texas Intermediate gained $2.06 per barrel to settle at $106.76.
The July employment report clearly disappointed with sluggish payroll gains. Earlier in the week, the Fed essentially did not show its hand on potential tapering of quantitative easing. The Fed is not yet willing to commit to unwinding easy policy. Otherwise, there were pluses and minuses on the recovery.
Last week’s FOMC statement did not issue a reduction in quantitative easing but it left the door open for coming months. Policy rates were left unchanged, including the fed funds target rate of zero to 0.25 percent. The vote was 11-1 with Kansas City's Esther George dissenting and St. Louis Fed's James Bullard not dissenting as he had at the prior meeting for more easing. But in his post-FOMC speech, Bullard indicated that the FOMC needs to see better economic data before tapering-actual data, not just forecasts.
The Fed downgraded the characterization of the economy to "economic activity expanded at a modest pace" versus the last statement's "economic activity expanded at a moderate pace." The focus remains on the labor market.
"Labor market conditions have shown further improvement in recent months, on balance, but the unemployment rate remains elevated."
There were mixed comments on other sectors of the economy. The Fed still sees inflation as soft and below target and allowing continued easing.
Quantitative easing plans remain the same.
"To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month."
The Fed continues to reinvest principal payments from its holdings of agency debt and agency mortgage-backed securities and of rolling over maturing Treasury securities at auction.
Future changes in policy are data dependent-an improved economy with acceptable inflation. Again, the Fed will take into account other information on the labor market, inflation, and the economy in general.
The Fed is emphasizing that there will be stages in unwinding currently loose policy, partially reflecting earlier comments by Fed Chairman Ben Bernanke. Rates will remain exceptionally low "for a considerable time after the asset purchase program ends and the economy strengthens."
Overall, little changed since the prior FOMC statement. However, the Fed is signaling that changes are coming but slowly.
 Second quarter GDP growth topped expectations but partly due to first quarter GDP being revised down with annual revisions. GDP gained an annualized 1.7 percent, following a 1.1 percent rise in the first quarter. The prior estimate for the first quarter was 1.8 percent. Analysts had projected a 1.1 percent advance for second quarter GDP.
Demand was soft in the second quarter but even softer than earlier believed in the first quarter. Final sales of domestic product posted at a gain of 1.3 percent versus the second quarter rise of 0.2 percent. Final sales to domestic producers (which exclude net exports) increased 2.0 percent after nudging up 0.5 percent in the first quarter.
The acceleration in real GDP in the second quarter primarily reflected upturns in nonresidential fixed investment (plus 4.6 percent versus minus 4.6 percent in the first quarter) and in exports (up 5.4 percent versus down 1.3 percent), and a smaller decrease in government spending (down 0.4 percent versus down 4.2 percent) that were partly offset by an acceleration in imports (up 9.5 percent versus 0.6 percent) and decelerations in private inventory investment (rising to $56.7 billion from $42.2 billion versus rising from $7.3 billion to $42.2 billion) and in PCE (up 1.8 percent versus 2.3 percent).
Overall inflation slowed in the second quarter. Headline inflation for the GDP price index rose an annualized 0.7 percent after a 1.3 percent increase in the first quarter. When excluding food and energy, inflation eased to 1.1 percent in the second quarter from 1.6 percent the prior quarter.
 The latest GDP data include annual revisions. Annual average growth for 2012 was revised up to 2.8 percent from 2.2 percent; 2011 unrevised at 1.8 percent; and 2010 was nudged up to 2.5 percent from 2.4 percent.
Overall, the most recent quarterly numbers leave the markets and the Fed about where the economy was expected to be. The somewhat stronger second quarter growth was offset by a downward revision to the first quarter. Core inflation is not a worry although energy is, based on more recent monthly numbers.
 The jobs picture is not improving overall. Payroll employment grew less than expected in July even though the unemployment rate came in lower than expected.
Total payroll jobs in July increased 162,000 after gaining a revised 188,000 in June (originally up 195,000) and increasing 176,000 in May (previous estimate was 195,000). Expectations were for a 175,000 gain for July. The net revisions for May and June were down 26,000. The unemployment rate eased to 7.4 percent in July from 7.6 percent the month before. The consensus was for a 7.5 percent unemployment rate.
Turning back to payroll data, private payrolls increased 161,000 after rising 196,000 in June (originally 202,000). Expectations were for a 185,000 advance.
 Private service-providing jobs increased 157,000 after a 188,000 gain in June. The July rise was led by retail trade (up 47,000), food services and drinking places (up 38,000), financial activities (up 15,000), and wholesale trade (up 14,000).
Temporary help services gained only 8,000 after a 16,000 increase in June.
Goods-producing jobs rose marginally, advancing 4,000 after an 8,000 gain in June. Manufacturing gained 6,000 in July; mining improved 5,000; and construction declined 6,000.
Government jobs nudged up 1,000 in July, following a decrease of 8,000 the month before.
Wage growth turned negative in July but followed a strong month before. Average hourly earnings slipped 0.1 percent in July after a 0.4 percent jump the prior month. Analysts projected a 0.2 percent gain. The average workweek was 34.4 hours, down from 34.5 in June. The market consensus was for 34.5 hours.
Turning to detail for the household survey, household employment in July rose 227,000 after a gain of 160,000 the prior month. The labor force slipped 37,000, following an increase of 177,000 in June. The number of unemployed fell 263,000 thousand after rising 17,000.
Looking ahead, the latest payroll data suggest weakness in July in personal income and manufacturing production. Private aggregate earnings slipped 0.1 percent in July and suggest softness in the private wages & salary component of personal income. The manufacturing component of industrial production may decline as production worker hours in manufacturing decreased 0.5 percent in July.
July employment numbers mostly were disappointing. Payrolls were particularly soft. Some may point to the dip in the unemployment rate as leading to the Fed to soon begin tapering bond purchases. If the Fed does, it almost certainly will not be due to this employment report as payroll growth was weak and the Fed knows that the household survey is volatile due to its small sample size.
 Personal income growth in June was moderately strong along with personal spending. But inflation cut into both. Personal income advanced 0.3 percent in June percent after a 0.4 percent rise in May. The wages & salaries component grew a robust 0.5 percent, following a 0.3 percent boost in May.
Consumer spending surged 0.5 percent in June, following a 0.2 percent rise the prior month. Nondurables led the gain, boosted by gasoline prices. Durables also were strong due to auto sales.
 Headline inflation was stronger with a 0.4 percent increase after rising 0.1 percent in May. The core inflation rate rose 0.2 percent in June, following a 0.1 percent gain in May.
Despite the latest jump in inflation at the headline level, longer-run inflation is still soft. Year-on-year, headline prices were up 1.3 percent in June versus 1.1 percent in May. The core was up 1.2 percent, equaling the May rate. These numbers are well below the Fed’s inflation target of 2.0 percent and policy change threshold of 2.5 percent expected inflation.
 The consumer sector improved nominally in June but inflation cut into the gain—a notable reason that real GDP growth in the second quarter was sluggish. More recently, July employment data were soft and indicate only modest progress for the consumer sector for that month. Aggregate earnings were negative and on the spending side, motor vehicle sales were down after a strong June. The July personal income report likely will be on the weak side.
 Unit vehicle sales slipped in July, down 1.8 percent but at still a very strong annual rate of 15.7 million. Also, the July dip followed a strong 4.2 percent boost in June. July sales of imports were steady at a 3.4 million rate with the monthly softness on the domestic side at a 12.2 million rate versus June's 12.6 million. The softness on the domestic side was split evenly between cars and light trucks.
In terms of retail sales, there are plenty of special factors in these numbers that cloud the monthly comparison. The manufacturers' numbers include an allocation of sales to businesses (based on registration estimates), which are not counted in retail sales, while the motor vehicle component of the retail sales report includes sales of used cars and sales of auto parts, neither of which are part of the manufacturers' numbers. Also prices are in play as retail sales are in dollar terms, not unit terms.
Though sales were slightly down compared to June, the bottom line is that consumers are flexing their muscles and are buying vehicles at a strong pace.
 The latest consumer confidence report raises the question of whether the consumer has a more optimistic view of the current labor market than official statistics.
There is more good news than meets the eye with the consumer confidence report where a nearly 2 point dip to 80.3 masks a strong gain in the present situation component. The assessment of the present situation offers the consumer's view of month-to-month conditions and a sharp gain here, of nearly 5 points to 73.6, hints at gains for the sweep of July's economic data.
Jobs hard to get, which is a closely watched month-to-month reading on the consumer's assessment of the current jobs market, fell to 35.5 percent for a sizable 1.6 percentage point decline from June which is very good news.
But outside the assessment of the current jobs market, there is significant weakness in this report. The expectations component was down 6.4 points to 84.7 in a drop that reflects lack of confidence in the outlook for the jobs market, which of course is in contrast to the current assessment. Fewer consumers see job openings rising six months from now and more see job openings contracting.
A positive detail in the report, one that is not measured in the headline index, is strength in buying plans. More consumers expect to buy a house in the next six months as well as a vehicle. Expectations for appliance purchases are also up.
The big rise underway in gas prices is not affecting the consumer, at least not yet. This points to resilience and confirms confidence in the present jobs market which is allowing consumers to look beyond the rise underway in pump prices. Inflation expectations are unchanged at 5.5 percent.
Another positive factor to consider is the tough comparison with June when many readings were at recovery highs. The message from the consumer is caution in the longer term outlook but confidence in the near term.
 Rising mortgage rates together with rising home prices are cutting into sales of existing homes, according to the National Association of Realtors (NAR) whose pending home sales index for June is down 0.4 percent. However, this follows a robust 5.8 percent jump in May.
This report tracks contract signings and the NAR notes that rising rates are making prospective buyers change their minds which helps explain why strength in this report for May did not translate to strength for existing home sales in June. Typically, about 80 percent of pending home sales become existing home sales within two months.
Regional data for June show another gain, at plus 3.3 percent, for the West where real estate activity continues to be very strong. But other regions are flat including slight declines in the Midwest and South.
Another factor hurting sales is a continued lack of supply on the market which, however, may begin to ease as prices rise. Also, atypically wet weather in June on the East Coast may have cut into contract signings as wet weather reduces traffic of pending buyers. More recently, mortgage rates eased in July after worries calmed about Fed tapering.
 Home prices are extending their run of strong gains though the overall gain in May was a little softer than prior months, at 1.0 percent which is still quite strong though down from gains of 1.7 and 1.9 percent in the prior two months. May's data show gains across 18 of 20 cities with modest declines in Minneapolis and Cleveland interrupting what had been sweeping gains across the 20 city sample going back to the beginning of the year. Year-on-year, sales show a 12.1 percent gain in May which matches April's recovery high.
Unadjusted data, which are closely followed in this report, tell the same story with the year-on-year rate up 12.2 percent. Monthly data for the unadjusted rate show a 2.4 percent gain reflecting seasonal pricing strength during the summer months.
Home price appreciation is a major plus that's lifting consumer spirits and the economic outlook.
July was a good month for Markit Economics' US manufacturing sample which, in the final July report, confirms strength in the mid-month report. The final PMI came in at 53.7 versus the flash mid-month reading of 53.2, both of which are meaningfully above June's final reading of 51.9. Any reading over 50 indicates monthly growth with the higher the reading, the greater rate of growth.
New orders were a special positive in the report, at 55.5 for a more than 2 point gain from June. Export orders are up, which is especially good news given prior weakness in foreign markets, as are total backlog orders. Output is up as is employment.
The price side showed increasing pressure for inputs, tied to fuel prices, but easing pressure for outputs, which is a negative for margins and also perhaps for Federal Reserve policy makers who are concerned that inflation is too low right now.
 ISM's manufacturing sample reports a burst of strength in July with the composite headline index up a striking 4.5 points to 55.4. This is the strongest reading in more than 2 years. New orders led the way, up nearly 6-1/2 points to 58.3. The production reading was also incredibly strong, up more than 11-1/2 points to 65.0 which is the strongest reading of the whole recovery.
Inventories were down which is another positive tied to strong production. Given the gain in new orders, inventories will have to be restocked which is a plus for future production and employment.
 Construction spending eased in June with a 0.6 percent dip after a gain of 1.3 percent in May and an increase of 1.1 percent in April. Expectations were for a 0.4 percent rise in June.
The June decrease was led by a 1.1 percent decline in public outlays after a 0.1 percent rise in May. Also, private nonresidential spending decreased 0.9 percent, following a 0.6 percent boost in May. Private residential outlays were flat after a 2.8 percent jump the month before.
On a year-ago basis, construction was up 3.3 percent in June, compared to 7.1 percent the month before.
Despite slippage in June, the construction sector is moderately healthy, taking into account prior monthly increases. Volatility should be expected with recently atypical wet weather on the East Coast.
Economic data were mixed. Employment was soft but manufacturing was up. On average, housing is still headed upward with prices looking particularly favorable. The consumer is spending moderately despite sluggish employment. But the overall picture is that there likely is not enough forward momentum for the Fed to make more than a token move on policy or guidance at its next FOMC meeting.
After last week’s sluggish second quarter GDP report and soft July employment situation, the ISM non-manufacturing survey for July may confirm or not whether the third quarter is posting slow or improving growth. Data for Europe are giving mixed signals but the June report for U.S. international trade will give hard numbers on the impact on U.S. growth from recession in Europe.
The composite index from the ISM non-manufacturing survey for June was pulled down by a sharp decline in new orders, slowing to 52.2 versus May's 53.7. Any reading over 50 indicates monthly growth, although June's reading indicates a slower rate of growth than May. Growth in new orders came to a standstill with the index just barely over breakeven at 50.8 for the lowest reading of the recovery. There was a notable plus in the report and that was the employment index which jumped 3.6 points to a respectable 54.7. Other readings include a sharp slowing in business activity, a rise in inventories, and a dip in exports. Price pressures remain soft.
ISM non-manufacturing composite index Consensus Forecast for July 13: 53.0
Range: 52.0 to 54.5
The U.S. international trade gap in May widened sharply. There were two obvious divergent moves in components. Exports were down and imports were up. But the rise in imports was not just in petroleum, indicating some improvement in domestic demand even as export demand softened. The trade gap jumped to $45.0 billion from $40.1 billion in April. Exports fell 0.3 percent, following a 1.3 percent gain in April. Imports rose 1.9 percent in May after a 2.4 percent boost the month before. The worsening in the trade gap was primarily due to the nonpetroleum goods deficit which grew to $41.6 billion in May from $37.6 billion the prior month. The petroleum deficit expanded to $20.8 billion from $19.7 billion in April. The services surplus advanced to $18.4 billion from $18.3 billion.
International trade balance Consensus Forecast for June 13: -$43.0 billion
Range: -$48.3 billion to -$38.0 billion
The Labor Department’s Job Openings and Labor Turnover Survey showed the labor market continuing to improve but slowly. The number of job openings in May was 3.828 million, little changed from April’s 3.800 million. Both hires and separations are oscillating upward with hires running a little higher than separations. In May, there were 4.441 million hires versus 4.395 million the month before. There were 4.323 million total separations in the month of May—slightly up from 4.287 million in April.
JOLTS job openings Consensus Forecast for June 13: 3.850 million
Range: 3.790 million to 3.900 million
Consumer credit outstanding in May rose a sharp $19.6 billion. Revolving credit jumped $6.6 billion for the largest gain since May of last year and the second largest of the recovery. The gain points to a jump in credit card use which, if extended, would be a big plus for retailers. But the trend for revolving credit has been very flat, up one month and down the next which raises the risk that May's gain will be an outlier. Non-revolving credit also jumped in the month, up $13.0 billion for yet another outsized gain that reflected both strong car sales but also gains in the student loan component that are tied in part to ongoing government acquisitions of student loans from private lenders, acquisitions that do not necessary reflect current student borrowing.
Consumer credit Consensus Forecast for June 13: +$15.0 billion
Range: +$13.5 billion to +$20.0 billion
Initial jobless claims readings last week were mostly at their lowest points of the recovery, but the results are less than convincing given seasonal distortions tied to temporary summer layoffs in the auto industry. Initial claims fell 19,000 in the July 27 week to a recovery low of 326,000. The 4-week average is near a recovery low, down 4,500 at a 341,250 level that is slightly below the month-ago comparison. Continuing claims were down 52,000 in the latest available data which are for the July 20 week. The level, at 2.951 million, was not a recovery low but was very nearly so, as is the 4-week average at 3.026 million.
Jobless Claims Consensus Forecast for 8/3/13: 336,000
Range: 330,000 to 345,000
Wholesale inventories in May fell 0.5 percent for the largest monthly draw since September 2011. The draw reflected a big jump in sales, at plus 1.6 percent in May which brings down the sector's stocks-to-shipment ratio to 1.18 which is the lowest since April last year. A low stock-to-sales ratio points to the need for restocking which is a plus for production and employment.
Wholesale inventories Consensus Forecast for June 13: +0.4 percent
Range: 0.0 to +0.7 percent
R. Mark Rogers is the author of The Complete Idiot’s Guide to Economic Indicators, Penguin Books.
Econoday Senior Writer Mark Pender contributed to this article.
|
![[Econoday]](images/econoday_logo_slim.gif){kind=logo}
![[Econoday]](images/logo.gif){kind=logo}