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SIMPLY ECONOMICS

Cross currents in the economy
Econoday Simply Economics 7/25/14
By R. Mark Rogers, Senior U.S. Economist

  

The economy is resuming healthy growth.  But is not without cross currents.  Earnings reports were mixed this past week but more up than down.  Economic news was mixed by sector.  Inflation data for June told one story at the headline and another at the core.  And geopolitical issues (Ukraine and Gaza) weighed on markets.


 

Recap of US Markets


 

STOCKS

Major equity indexes ended the week mixed.  Stocks dipped Monday on increased violence in Ukraine and Gaza.  Investors were worried about additional sanctions against Russia.  Stocks rebounded notably Tuesday on better-than-expected CPI data and on a strong-than-forecast existing home sales figure.

 

Wednesday, the S&P 500 hit a record high.  Surprisingly strong earnings helped support the boost with notable gains seen in tech and health care. 


 

Thursday, stocks were virtually unchanged. Neither corporate earnings nor the latest economic data moved investors.  It was a case of offsetting economic indicators. While jobless claims dropped to the lowest since mid-February 2006, new home sales plunged 8.1 percent in June, the biggest decline in almost a year.  The S&P 500 hit a record close Thursday.

 

Friday, stocks tumbled despite a better-than-expected advance in durables orders.  Company news tugged down on equities after earnings from Amazon.com and Visa fell short of analysts' estimates.

 

Equities were mixed this past week. The Dow was down 0.8 percent; the S&P 500, unchanged; the Nasdaq, up 0.4 percent; the Russell 2000, down 0.6 percent; and the Wilshire 5000, unchanged.

 

For the year-to-date, major indexes are up as follows: the Dow, up 2.3 percent; the S&P 500, up 7.0 percent; the Nasdaq, up 6.5 percent; and the Wilshire 5000, up 6.1 percent.  The Russell 2000 is down 1.6 percent;


 

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.


 

BONDS

Treasury yields ended the week little changed except for the 30-year bond.  The short end was up a tick while the 10-year bond rate also declined but barely so.  The only notable movement was seen on Thursday and Friday.  But on Wednesday with an incremental change, the 10-year bond yield traded at almost the lowest since May.  Thursday saw rates rise as jobless claims posted well below expectations to an 8-year low.  Friday, yields headed in the other direction, declining on flight to safety as funds flowed from stocks to bonds.  Also, the durables report showed weakness in shipmens for capital equipment, raising worries about this portion of the economy.

 

For this past week Treasury rates were mixed as follows: 3-month T-bill, up 1 basis point; the 2-year note, up 1 basis point; the 5-year note, up 1 basis point; the 7-year note, unchanged; the 10-year note, down 1 basis point; and the 30-year bond, down 5 basis points.


 

OIL PRICES

The spot price of West Texas Intermediate fell slightly this past week.  The notable daily swings were Monday, Wednesday, and Thursday.  Monday, WTI jumped just under $2 per barrel as U.S. inventories declined on strong refinery demand.  Inventories at Cushing, Oklahoma hit a six-year low.  Also, Tuesday was expiration for WTI August delivery.

 

Wednesday, spot WTI dipped $1 a barrel, coming off the boost earlier in the week.  Thursday saw a decline in crude of just over a dollar a barrel as gasoline inventories rose in the latest government report, slowing down demand for crude.

 

Net for the week, the spot price for West Texas Intermediate eased 99 cents per barrel to settle at $101.96.


 

The Economy

Economic growth currently is very mixed by sector.  Inflation has been somewhat high recently, but there are signs of some modest deceleration.


 

Existing home sales rise in June

The housing market is very mixed currently. But the first report out of the gate last week was favorable. Existing home sales picked up sharply in the second quarter following a lull in the first quarter. Sales of existing homes rose 2.6 percent in June to a higher-than-expected annual rate of 5.04 million. The gain comes against difficult comparisons, an upwardly revised 5.4 percent jump in May and a 1.5 percent gain in April. Sales contracted in each of the first three months of the year.

 

The gain in June was very well balanced with single-family sales up 2.5 percent to a 4.43 million rate and with condo sales up 3.4 percent to a 610,000 rate. All regions showed gains in the month led by the Midwest at 6.2 percent.

 

Strength did not come at the expense of prices as the median rose 5.3 percent to $223,300.  But a recent report on home prices suggests that the price gain was primarily a shift in composition of sales toward the high end. The year-on-year median is up 4.3 percent, a contrast to sales which, despite the recent strength, are still down year-on-year at minus 2.3 percent.

 

The rise underway in both prices and sales is drawing sellers into the market with supply on the market at 2.30 million versus 2.25 million in May and compared with 2.16 million in June last year. The gain in supply matched the gain in sales as supply at the monthly sales rate was unchanged at 5.5 months and again up from June last year at 5.0 months.

 

Sales of new homes also surged in May and April, again bouncing back strongly from a weak winter quarter in gains that contrast sharply with the troubling and hopefully temporary weakness apparent in housing starts and permits. Watch for new home sales Thursday morning.


 

New home sales unexpectedly drop sharply in June

Rarely are monthly data as volatile as the latest new home sales report where the outlook for the sector has suddenly shifted from strong to weak. New home sales came in at a paltry annual rate of 406,000 in June while the May reading, which was extraordinarily strong, was revised 62,000 lower to 442,000.

 

June's 8.1 percent drop was the biggest percent decline in almost a year and followed an 8.3 percent boost the month before.

 

All regions showed declines in June with the most important region, the South because of its overwhelming size in this report, posting a 9.5 percent drop.

 

The drop in sales raised supply relative to sales, to 5.8 months vs May's 5.2 months. But total new homes for sale did rise, to 197,000 vs 191,000 in May.

 

Price data show a 3.2 percent decline for the median price to $273,500 for a year-on-year rate of plus 5.3 percent which is in sharp and unsustainable contrast to the year-on-year sales rate which is at minus 11.5 percent.

 

Signals from the new home sector have been mixed with the housing market index from the nation's home builders showing strength in sales and expectations of sales but not housing starts and permits which have been plummeting. This report is somewhere in the middle but definitely on the weak side in what is a clouded and uncertain view of the new home market.


 

FHFA home prices show slower growth

Demand for existing homes appears to be softening despite the latest sales number. Sales are being supported in part by less robust prices. Home price appreciation slowed this spring in what is perhaps the latest sign of concern for the housing sector. FHFA prices did rise a respectable 0.4 percent in May, but the year-on-year rate slowed by 6 tenths to plus 5.5 percent from a revised 6.1 percent. This rate had been in the 7.0 percent range earlier in the year.

 

The regional breakdown shows special monthly weakness in East South Central and East North Central with gains in the West South Central and Middle Atlantic.

 

Case-Shiller data also showed slowing in its last report. Lower price growth will give a needed boost to home sales but at the same will limit homeowner wealth in what is a negative for household spending.


 

Durables orders rise overall but investment a question mark

Durables orders made a comeback in June.  New factory orders for durables rebounded 0.7 percent, following a decline of 1.0 percent in May. Excluding transportation, orders advanced 0.8 percent in June, following a dip of 0.1 percent in May.  Analysts projected 0.7 percent.

 

Transportation partially rebounded 0.6 percent after falling 2.6 percent in May. The latest boost was from defense aircraft and nondefense aircraft. Motor vehicles declined.


 

Outside of transportation, gains were posted in primary metals, machinery, computers & electronics, and "other."  Declines were in fabricated metals and electrical equipment.

 

Orders for equipment investment improved. Nondefense capital goods orders excluding aircraft rebounded 1.4 percent in June after decreasing 1.2 percent the month before. Shipments of this series, however, fell 1.0 percent in June after slipping 0.1 percent the month before.  These numbers point to softness in the business equipment component in second quarter GDP.

 

Manufacturing continues on a recent uptrend, retaining its role as a key engine of growth.  Durables orders have been up in four of the last five months.  Manufacturing continues on a recent uptrend, retaining a key engine of growth.  Durables orders have been up in four of the last five months.   However, the weakness in capital equipment shipments is disconcerting.


 

Markit flash PMI manufacturing still well into positive territory for July

The first national reading on manufacturing for July came in quite healthy. Growth slowed but remained very strong for Markit's US manufacturing sample where the PMI for June came in at 56.3, down 1.0 point from final June's 57.3 and down 1.2 points from the June mid-month reading of 57.5. Markit Economics is now only posting isolated details for this report though it does say that output is over 60 at 60.4. It also said strength is centered in domestic business, not exports where orders are only slightly above 50. The report noted that employment is at a 10-month low though still above 50. Among other factors, inventories rose and input cost pressures eased while finished goods prices rose. This report doesn't show the acceleration seen this month in the Empire State or Philly Fed reports, but it does indicate that the manufacturing sector, or at least Markit's sample of the manufacturing sample, is enjoying a strong summer.


 

Consumer price inflation steady in June

Inflation pressures held steady at a noticeable level in June, headlined by a 0.3 percent rise for the consumer price index. Though this is down 1 tenth from May's 0.4 percent jump, the year-on-year rate remains just above the key 2 percent level at 2.1 percent.

 

But there was an easing in the monthly core reading which excludes food and energy, inching only 0.1 percent higher versus May's outsized 0.3 percent gain. But here too, the year-on-year rate is unchanged, pressing right at the Fed's goal of 2 percent at 1.9 percent.


 

Gasoline, which often rises in the summer driving season, was the center of pressure in this report, jumping 3.3 percent in the month though the year-on-year rate actually slipped 3 tenths to plus 2.0 percent. Food prices, which had been on the rise, edged only 0.1 percent higher as fruits, dairy and cereals contracted. This drove the year-on-year food rate down 2 tenths to plus 2.3 percent.

 

Helping to ease the core rate was a slowing in growth in shelter costs—which posted a relatively high increase in May.  Elsewhere, drugs and tobacco showed sharp gains as did apparel with an unusually strong gain of 0.5 percent in the month. Otherwise, other readings show no more than incremental pressure.

 

There's something in this report for everyone at the Federal Reserve, though the year-on-year rates will likely have the hawks continuing to warn that inflation may be closer than it appears.  But the latest data do corroborate Fed Chair Janet Yellen's view that the recent strength in inflation was temporary.  The June CPI was led by a jump in gasoline prices which are now headed down.


 

The bottom line

Second quarter growth appears to have rebounded nicely and very early numbers for the third quarter are favorable.  But sectors remain mixed with manufacturing taking the lead, the consumer sector growing and possibly improving, but with housing oscillating.


 

Looking Ahead: Week of July 28 through August 1 

This week's highlight is the employment situation report for July.  With recent declines in jobless claims, payroll growth may strengthen.  Early in the week, the advance estimate for second quarter GDP will indicate how much of a rebound there was after the freeze-induced decline in the first.  Also, recent history will be re-written with annual revisions.  The consumer sector is supporting economic growth, just behind manufacturing.  The personal income report will indicate how much "fuel" the consumer has for spending.  And the first reading on consumer spending in the third quarter posts with July motor vehicle sales—which have been healthy.


 

Monday 

The Markit PMI services index was up 3.1 points in June from final May. The 61.2 reading indicates very sharp monthly growth.  The post-winter bounce is giving a major lift to Markit's service-sector sample where readings are at or near their best levels in the 5-year history of the report. The index has risen 7.9 points from its winter low in February.  New business, perhaps the most important reading of all in the report, was up 2.9 points from final May to 61.6 which points to general strength ahead.

 

Markit PMI services index (flash) Consensus Forecast for July 14: 60.0

Range: 59.0 to 61.4


 

The pending home sales index was up a very strong 6.1 percent in May. This gain, coming off a low base, was the largest since the housing stimulus efforts of April 2010.  All regions showed solid gains led by the Northeast, which has proven to be the strongest region for existing home sales, and followed by the West where sales have been the weakest. June data suggest a third straight gain for final sales of existing homes which would be the strongest run since this time last year, just before the Fed began to wind down stimulus.

 

Pending home sales Consensus Forecast for June 14: +0.3 percent

Range: -1.0 to +5.5 percent


 

The Dallas Fed general business activity index in its Texas manufacturing survey June rose from 8 to 11.4. The majority of respondents noted no change from May levels, although some 20 percent noted an increase in activity. The company outlook index rose 4 points to 8.4 after falling sharply last month   The production index, a key measure of state manufacturing conditions, rose from 11 to 15.5, indicating output grew at a faster pace than in May.  Other measures of current manufacturing activity also reflected growth in June. The new orders index rose from 3.8 to 6.5 but remained below the levels seen earlier in the year. The capacity utilization index held steady at 9.2. The shipments index came in at 10.3, similar to its May level, with nearly a third of manufacturers noting an increase in volumes.

 

Dallas Fed general business activity index Consensus Forecast for July 14: 12.0

Range: 10.0 to 15.0


 

Tuesday

The S&P/Case-Shiller 20-city home price index (SA) slowed very sharply in April, to only plus 0.2 percent seasonally adjusted from plus 1.2 percent in March. A change of this degree is unusual for Case Shiller's data which are smoothed by a three-month moving average. The average aside, April's monthly change was no doubt deeply in the negative column as the average would not have been pulled down so much unless the April actual was so weak—perhaps even negative.  The adjusted year-on-year rate slowed to 10.8 percent, down from 12.3 percent in March and slightly higher readings in the preceding months.

 

The S&P/Case-Shiller 20-city HPI (SA, m/m) Consensus Forecast for May 14: +0.4 percent

Range: -0.5 to +1.4 percent

 

The S&P/Case-Shiller 20-city HPI (NSA, m/m) Consensus Forecast for May 14: +0.4 percent

Range: +0.3 to +2.0 percent

 

The S&P/Case-Shiller 20-city HPI (NSA, y/y) Consensus Forecast for May 14: +9.9 percent

Range: +9.2 to +10.3 percent


 

The Conference Board's consumer confidence index

is moving steadily to new recovery highs, to 85.2 in June vs a revised 82.2 in May. This was the fourth straight month that the index was over the 80 barrier, above which indicates that optimists are out ahead of pessimists. June's gain was centered in the present situation component which is at a recovery best of 85.1 for a 4.8 point gain from May. This June-to-May comparison points to strength for the run of June's consumer-sector data.

 

Consumer confidence Consensus Forecast for July 14: 85.5

Range: 83.5 to 88.5 


 

Wednesday

ADP private payroll employment in its report for June posted a 281,000 boost, compared to the later reported 262,000 for the same period.

 

ADP private payrolls Consensus Forecast for July 14: 235,000

Range: 200,000 to 270,000


 

GDP growth really surprised on the downside for the third estimate for the first quarter. Adverse winter weather had a huge impact as the first quarter fell a revised 2.9 percent after rising an annualized 2.6 percent in the fourth quarter. The latest number was significantly below market expectations for a 1.8 percent decline.  The second estimate was a "mere" minus 1.0 percent annualized.  The first quarter number was the weakest since minus 5.4 percent for the first quarter of 2009.  A huge hit came in the consumer sector as PCEs growth was revised down to 1.0 percent from the second estimate of 3.1 percent. Consumers were hindered from shopping due to severe winter weather. Net exports were lowered sharply to minus $441.1 billion versus the prior estimate of minus $418.9 billion.  On the price front, the chain-weighted price index posted at 1.3 percent annualized, down from 1.6 percent in the fourth quarter. The latest number matched expectations. The core chain index eased to 1.2 percent in the first quarter from the reading of 1.9 percent in the fourth quarter. The second quarter GDP figure is expected to show a rebound after the first quarter's adverse weather induced decline.  This report will include annual revisions.

 

Real GDP Consensus Forecast for advance Q2 14: +3.1 percent annual rate

Range: +2.3 to +4.0 percent annual rate

 

GDP price index Consensus Forecast for advance Q2 14: +2.0 percent annual rate

Range: +1.5 to +2.6 percent annual rate


 

The FOMC announcement at 2:00 p.m. ET for the July 29-30 FOMC policy meeting is expected to leave policy rates unchanged and taper as earlier scheduled.  With no press conference and no updated forecasts, trader focus likely will be on the characterization of the economy.


 

Thursday

Initial jobless claims fell a very surprising 19,000 in the July 19 week to a much lower-than-expected level of 284,000. Unless retooling layoffs in the auto sector are less than usual this summer or are starting later than usual, jobless claims may be signaling a major shift in strength for the labor market. The 284,000 level is a recovery low (the lowest since 2006) as is the four-week average, down 7,250 to 302,000 (the lowest since 2007).

 

Jobless Claims Consensus Forecast for 7/26/14: 305,000

Range: 295,000 to 320,000


 

The employment cost index softened noticeably in the first quarter, to plus 0.3 percent. This reading matches the record low for this series, hit only twice before in 32 years of data, first in first quarter 2009 and then again in third quarter 2011. The year-on-year rate of plus 1.8 percent is the lowest reading since second quarter 2012.  Looking at components, growth in wages & salaries was a very soft 0.3 percent with the year-on-year rate at plus 1.6 percent, no better than many other year-on-year readings on inflation. Benefits rose 0.4 percent for a year-on-year rate of plus 2.1 percent.

 

Employment cost index Consensus Forecast for Q2 14: +0.5 percent

Range: +0.4 to +0.5 percent


 

The Chicago PMI for June came in far above breakeven 50 at 62.6. Details, which are released only to paid subscribers, were sketchy but included an unusually strong reading for production, over 70, but also included declines in new orders and backlogs which point to slowing production growth ahead. Prices paid were described as unchanged which is perhaps a surprise given isolated indications that inflation pressures may be building.

 

Chicago PMI Consensus Forecast for July 14: 63.2

Range: 61.0 to 65.0


 

Friday

Sales of total light motor vehicles rose 1.2 percent in June to a 17.0 million annual rate which is the strongest rate since way back in July 2006. Sales of both North American-made and foreign-made vehicles rose in the month with domestic cars and imported trucks showing special strength.

 

Motor vehicle domestic sales Consensus Forecast for July 14: 13.2 million-unit rate

Range: 13.1 to 13.2 million-unit rate

 

Motor vehicle total sales Consensus Forecast for July 14: 16.7 million-unit rate

Range: 16.6 to 17.2 million-unit rate


 

Nonfarm payroll employment increased 288,000 in June after a 224,000 gain in May and a 304,000 rise in April. The net revision for the prior two months was up 29,000. April's gain was the first plus 300,000 figure since January 2012.  The unemployment rate surprisingly fell to 6.1 percent from 6.3 percent in May. Expectations were for 6.3 percent.   The U6 underemployment rate edged down to 12.1 percent from 12.2 percent in May.  Turning back to the payroll report, private jobs gained 262,000 after a 224,000 boost the month before. Government jobs jumped 26,000 after being flat in May.  Average weekly hours were unchanged at 34.5 hours. Growth in average hourly earnings held steady at 0.2 percent, also matching the consensus.

 

Nonfarm payrolls Consensus Forecast for July 14: 233,000

Range: 200,000 to 280,000

 

Private payrolls Consensus Forecast for July 14: 233,000

Range: 200,000 to 275,000

 

Unemployment rate Consensus Forecast for July 14: 6.1 percent

Range: 6.0 to 6.1 percent

 

Average workweek Consensus Forecast for July 14: 34.5 hours

Range: 34.5 to 34.6 hours

 

Average hourly earnings Consensus Forecast for July 14: +0.2 percent

Range: +0.2 to +0.3 percent


 

Personal income rose 0.4 percent in May, following a 0.3 percent advance the month before. The important wages & salaries component increased 0.4 percent after a 0.3 percent gain in April.  Personal consumption posted a sluggish 0.2 percent rise in May versus no change the month before. For May, sluggishness was in services which edged up only 0.1 percent after a 0.1 percent rise in April. Durables-reflecting auto sales-rebounded 0.7 percent, following a 0.9 percent drop in April. Nondurables rose a soft 0.2 percent after a 0.4 percent boost in April.  PCE inflation came in at a monthly 0.2 percent for both May and April. Core PCE inflation monthly numbers were the same as headline for May and April.  On a year ago basis, headline inflation was 1.8 percent in May versus 1.6 percent the month before. Core inflation on a year-ago basis firmed to 1.5 percent from 1.4 percent in April.

 

Personal income Consensus Forecast for June 14: +0.4 percent

Range: +0.3 to +0.6 percent

 

Personal consumption expenditures Consensus Forecast for June 14: +0.4 percent

Range: +0.3 to +0.5 percent

 

PCE price index Consensus Forecast for June 14: +0.2 percent

Range: +0.2 to +0.3 percent

 

Core PCE price index Consensus Forecast for June 14: +0.1 percent

Range: +0.1 to +0.3 percent


 

The Markit PMI manufacturing flash index for July slowed but remained very strong for Markit's US manufacturing sample where the PMI came in at 56.3, down 1.0 point from final June's 57.3 and down 1.2 points from the June mid-month reading of 57.5. Markit Economics is now only posting isolated details for this report though it does say that output is over 60 at 60.4. It also said strength is centered in domestic business, not exports where orders are only slightly above 50. The report noted that employment is at a 10-month low though still above 50. Among other factors, inventories rose and input cost pressures eased while finished goods prices rose.

 

Markit PMI manufacturing index (final) Consensus Forecast for July 14: 56.0

Range: 55.5 to 57.8


 

The Reuter's/University of Michigan's consumer sentiment index for preliminary July was mixed with the headline on the soft side, down 1.2 points to 81.3, but the current conditions component showing a little bit of strength, up 5 tenths to 97.1. The gain for current conditions hints at steady and incremental growth for consumer activity so far this month.  The weakness in the report, what there is, is in the expectations component, down 2.4 points to 71.1. This component is a bit elusive but does hint at a lack of confidence in future job and income prospects.

 

Consumer sentiment Consensus Forecast for final July 14: 81.5

Range: 81.0 to 83.7


 

The composite index from the ISM manufacturing survey for June held steady at 55.3.  However, new orders were the key highlight of the ISM report for June, overshadowing the headline composite index. New orders rose 2.0 points to a very strong 58.9 which point to acceleration for general activity in the months ahead. Production, at 60.0, is already very strong as are imports, at 57.0 for a 2.5 point gain.

 

ISM manufacturing composite index Consensus Forecast for July 14: 56.0

Range: 55.0 to 56.8


 

Construction spending in recent months has been volatile and reflects sluggish construction activity on average.  Outlays increased 0.1 percent May after a 0.8 percent rise in April (originally up 0.2 percent).  The latest rise was led by a 1.1 percent boost in private nonresidential spending, following a 0.1 percent increase the month before. Public spending rose 1.0 percent after a 2.1 percent jump in April.  Private residential spending fell 1.5 percent after rising 0.5 percent the month before. Weakness for this component was in both new one-family outlays and multifamily outlays.

 

Construction spending Consensus Forecast for June 14: +0.5 percent

Range: 0.0 to +0.9 percent


 

R. Mark Rogers is the author of The Complete Idiot's Guide to Economic Indicators, Penguin Books.


 

He can also be found on a weekly broadcast talking about the U.S. economy, the easiest way to find him is by going to iTunes and searching for "Simply Economics."


 

Econoday Senior Writer Mark Pender contributed to this article.