BONDS
Once again, Treasury securities traded in a very tight trading range. While rising oil prices are often considered friendly news for the bond market, as they dampen economic activity, falling oil prices this week were considered less favorable. But reaction to lower oil was concentrated on Monday; afterwards, bonds were little changed. For the most part, economic indicators were in line with expectations and had little lasting impact on bond yields. Greenspan's remarks at the Jackson Hole conference were a non-starter.

Markets at a Glance

Weekly percent change column reflects percent changes for all components except interest rates. Interest rate changes are reflected in simple differences.

The Economy

Q2 GDP revised down
The Commerce Department's revised estimate of GDP shows that growth expanded at a 2.8 percent rate in the second quarter, rather than at a 3 percent rate. The downward revision was widely anticipated by economists after the June trade deficit surged. Indeed, net exports were revised substantially lower with slower export growth and significantly stronger import growth for the quarter. Not all the news was negative however. Even though residential investment spending was revised down marginally, business fixed investment growth was estimated at a 12.1 percent rate in this report, up from an 8.9 percent growth rate in the initial estimate. Spending on both equipment and nonresidential structures expanded more rapidly than initially thought. While personal consumption expenditures grew at a modest 1.6 percent rate in the second quarter, this was also an upward revision from the initial 1 percent growth estimate.

Real final sales grew at a 2.1 percent rate in the second quarter; not only was this significantly less than the first estimate but also substantially lower than the first quarter's 3.3 percent rate of growth. Real final sales have now grown less rapidly than real GDP for four straight quarters. It isn't unusual to see inventory building accelerate during an expansion, but now that economic growth has moderated and final sales are growing less rapidly than real GDP, the stage could be set for slower inventory building in coming months. There is less incentive for producers and retailers to accelerate inventory accumulation if demand has moderated.

Corporate profits were also released with this GDP report. Profits after tax rose from the previous quarter and in fact were up 18.5 percent versus a year ago. This was the fourth straight quarter in which year-over-year profits improved their rate of growth. But since market players are already trying to anticipate third and fourth quarter profits, these figures had little impact on the markets.

Two month rise in durable goods orders
New orders for durable goods rose 1.7 percent in July after a 1.1 percent hike recorded in June. While defense capital goods contributed strongly to the June rise, they were a drag on orders in July. Nondefense capital goods orders were up a meager 1.1 percent in June - but jumped 9 percent in July. It was a relief to see the June-July rise in new orders, as the April-May declines were troubling. The chart does show that monthly new orders can be extremely volatile. Typically, however, the increases outnumber the decreases during an economic expansion (while the reverse is true during a recession). The average monthly gain of 0.9 percent in new orders through the July is fairly positive - and in line with the average monthly increase recorded for 2003 as a whole.

As consumer spending moderates, it is up to the business sector to take up the slack. Wall Street economists are pretty much agreed on this point: consumer spending is not expected to grow as rapidly in the second half of the year as it did during 2003 (averaging 3.8 percent) or the first quarter of 2004 (a 4.1 percent rate). Instead, increases in equipment and software spending along with gains in nonresidential structures are expected to help boost GDP growth going forward.

Home sales drop in July
In contrast to housing starts, which jumped 8.3 percent in July, sales of single-family homes declined 3.4 percent in July. Sales of new homes plunged 6.4 percent in July after a 5.6 percent drop in June and are now 1.9 percent below year ago levels. Sales of existing homes fell 2.9 percent in July after rising 1.6 percent in June. Single-family existing home sales were still a whopping 8.6 percent higher than a year ago. Since the existing single family home sales market is roughly six times larger than the new home sales market, total home sales are still smoking relative to a year ago.

Oddly enough, it appears that total home sales were declining in the second half of 2003 as mortgage rates were falling, though they began to rise in the first half of 2004 as mortgage rates rose. This is not entirely inconsistent with economic intuition. Potential homeowners (procrastinators) had grown accustomed to low rates. But when they realized that rates could easily rise as fall, they figured they better get in the market before rates increase even further!

It is questionable whether the rapid run-up that took place in home sales in 2003 can continue. One can't open a newspaper, business section or otherwise, without seeing a story about the housing market bubble. One can certainly argue whether or not a bubble is indeed building. However, one can't argue with the sharp increases in home prices that have taken place over the past few years. In the 12-month period ending July, the average sales price of an existing home rose 10.1 percent and the average sales price of a new home was 10.4 percent higher. These kinds of increases have occurred for two or three years now. While current homeowners might have the equity to buy a new house, it is getting more difficult for new homeowners to buy their first house. Without first-time buyers entering the market, it will be harder to continue the price escalation.

Conference Board's Help Wanted Index stuck in the mud
The Conference Board's help wanted index fell back to 37 in July after dipping to 38 in June. Indeed, the help wanted index has ranged from 37 to 40 between March 2003 and July 2004. This index remains at its lowest levels ever, despite the fact that we have had worse economic recessions with much higher unemployment rates. It is hard to believe that the help wanted index would be so much worse than the unemployment rate or nonfarm payrolls for so long.

Monster.com, a help wanted advertising web site, now produces an employment index. We plan to write more about this in a future Short Take article. This index has indeed shown an improving trend through June and then a slight dip in July. The August figures will be reported on Thursday, September 2, the day before the employment situation. It is our contention that old-fashioned newspaper advertising is simply not as important today as it was 20 years ago. A friend told me that her daughter has found all her job opportunities in the past few years online. It could very well be that significantly more companies are now advertising online than in print, making The Conference Board's help wanted index out of sync with current times and the Monster employment index the index of the future.

The Bottom Line
Economic news was somewhat mixed this week as housing activity appeared to moderate in July while durable goods orders managed to post a gain for a second straight month. Real GDP growth was revised down slightly for the second quarter but this was in line with expectations. Among other data, initial jobless claims once again rose but remain in a tight range. The University of Michigan's consumer sentiment index fell in August from the July level but was revised higher from the mid-month reading.

Fed Chairman Alan Greenspan spoke at the Jackson Hole conference but his remarks were not focused on current economic conditions or monetary policy. He did indicate his views that budget deficits are unsustainable for the long run but, rather than increase taxes, he would increase the retirement age. Perhaps not all workers want to be working at his age (78 years old). But then not all workers are powerful Fed chairs!

Looking Ahead: Week of Aug 30 to Sept 3

Monday
Personal income inched up 0.2 percent in June after posting stronger increases in the six previous months. Wages and salaries were unchanged in June - and this depressed total income growth. The sluggish payroll figures for July point to another lackluster month. Personal consumption expenditures fell 0.7 percent in June due to a 5.9 percent plunge in durable goods spending. Retail sales rose in July and this bodes well for total consumption expenditures.

Personal income Consensus Forecast for July 04: 0.5 percent
Range: 0.4 to 0.6 percent

Personal consumption expenditures Consensus Forecast for July 04: 0.7 percent
Range: 0.5 to 1.0 percent

Tuesday
The Conference Board's consumer confidence index increased several points in July reaching a level of 106.1, which was nearly 30 points higher than the year ago level. Early indications for the University of Michigan consumer sentiment index for August suggest a slight drop for the month.

Consumer confidence index Consensus Forecast for Aug 04: 103
Range: 102 to 105

The business barometer from the NAPM-Chicago jumped more than 8 points in July to reach a level of 64.7. This was still a bit lower than the May level of 68! Market players view this index as a leading indicator for the manufacturing ISM, but keep in mind that it also incorporates non-manufacturing activity and thus moves more dramatically than the ISM in any given month.

NAPM-Chicago Consensus Forecast for Aug 04: 60
Range: 58 to 64.5

Wednesday
The ISM manufacturing index rose nearly one point in July to a level of 62. While this level indicates healthy manufacturing activity, the pace is somewhat softer than the first five months of the year when the index was over 62.

ISM manufacturing index Consensus Forecast for Aug 04: 60
Range: 57 to 61.5

Construction expenditures dipped 0.3 percent in June after inching up only 0.1 percent in May, a moderate retreat after posting healthier gains in the three previous months. Construction includes both residential and nonresidential spending. Until now, the residential market has been strong.

Construction spending Consensus Forecast for July 04: 0.4 percent
Range: 0.0 to +0.8 percent

Domestic motor vehicle sales jumped 15.7 percent in July to a 14 million-unit rate. Domestic cars were sold at a 5.5 million-unit rate while light trucks were sold at an 8.5 million-unit rate. Special incentives brought domestic auto and light truck sales back to May levels, but sales without incentives don't reach these levels!

Light truck sales Consensus Forecast for Aug 04: 8 million-unit rate
Range: 7.7 to 8.4 million-unit rate

Auto sales Consensus Forecast for Aug 04: 5.4 million-unit rate
Range: 5.2 to 5.5 million-unit rate

Thursday
New jobless claims rose 10,000 in the week ended August 21 to 343,000; nonetheless, the 4-week moving average dipped to 336,750. According to Labor Department officials, the rise was due primarily to the effects of Hurricane Charley. Claims are expected to drop again after hurricane victims return to work in coming weeks.

Jobless Claims Consensus Forecast for 8/21/04: 340,000 (-3,000)
Range: 330,000 to 353,000

Nonfarm business productivity was initially estimated to grow at a 2.9 percent rate in the second quarter. A downward revision in GDP growth may lead to a downward revision in productivity growth. Unit labor costs were estimated at a 1.9 percent rate for the second quarter. If productivity is revised down, then unit labor costs will be revised up.

Nonfarm business productivity Consensus Forecast for Q2 04: 2.7 percent rate
Range: 2.5 to 2.8 percent rate

Unit labor costs Consensus Forecast for Q2 04: 2.1 percent rate
Range: 1.9 to 2.4 percent rate

Factory orders increased 0.7 percent in June after posting a smaller 0.4 percent in May. While nondurable goods new orders rose in both months, durable goods orders declined in May. Among key components, new orders for construction materials and information technology posted declines in June. Capital goods orders as well as consumer goods orders rose however.

Factory orders Consensus Forecast for July 04: 1.1 percent
Range: 0.6 to 1.9 percent

Friday
Nonfarm payroll employment inched up a mere 32,000 in July after a downward revised gain of 78,000 in June. Despite the overall weakness, factory payrolls managed to post a 10,000 hike in July. The civilian unemployment rate dipped to 5.5 percent in July since the household survey managed to show a healthy employment gain. Average hourly earnings rose 0.3 percent in July after increasing only 0.1 percent in June. The average workweek increased 6 minutes to 33.7 hours.

Nonfarm payrolls Consensus Forecast for Aug 04: 150,000
Range: 95,000 to 250,000

Unemployment rate Consensus Forecast for Aug 04: 5.5 percent
Range: 5.4 to 5.6 percent

Average hourly earnings Consensus Forecast for Aug 04: 0.2 percent
Range: 0.2 to 0.3 percent

Average workweek Consensus Forecast for Aug 04: 33.7 hours
Range: 33.5 to 33.8 hours

The ISM non-manufacturing survey generally increased in July. The business activity index, which gets the most attention, rose to 64.8 in July from 59.9 in June. New orders also jumped four points to 66.4. The employment index fell back to 50 from 57.4 in June.