As predicted by IHS Global Insight, real GDP increased at a 2.3% annual rate in the second quarter. Consumer spending, up 2.9%, led the way with gains spread broadly across durable and nondurable goods and services. The first quarter of 2015 was revised up to 0.6% growth. These numbers are consistent with the Federal Reserve’s moderately upbeat assessment of the economy and the high probability of a September increase in the federal funds rate. Average real GDP growth for the 2011‒14 period was lowered from 2.3% to 2.0%. A drop in 2013 growth from 2.2% to 1.5% accounted for most of the revision. The newly reported weakness was concentrated in consumer spending and state and local government purchases.
Durable goods orders climbed 3.4%, driven by a surge in aircraft orders at the Paris Air Show. Core capital orders rose 0.9%; two-thirds of the increase was in the machinery category. Despite July’s increase, orders and shipments for core capital goods have dropped three straight quarters.
The Employment Cost Index showed the slowest rate of increase on record, at 0.2%. This figure is a bit of a shock, since it is not what is expected in a gradually tightening labor market. The central question is whether this sharp decline in wages and salaries will trigger alarm bells at the Fed, causing a delay for the first rate hike.
The Conference Board’s Consumer Confidence Index fell 8.9 points in July, to 90.9, the lowest reading since September of last year. Volatility in equity markets and financial issues in China and Europe were behind the decline. The University of Michigan’s Consumer Sentiment Index fell 3.0 points, to 93.1, the lowest level since November 2014.
The Federal Open Market Committee did not change its target federal funds rate at its July 29 meeting. The committee’s assessment of the economy was more upbeat. Notably missing, however, was a clear signal of the intent to raise the funds rate target at the next meeting in September.
Next week brings the employment report. Total payroll gains should tally 200,000 for July, while the unemployment rate rises to 5.4%. Both personal consumption and personal income likely rose 0.2% in June. The trade deficit likely widened, to $44.0 billion, as goods exports fell modestly while goods imports increased. Construction spending likely increased by 1.0%, with gains in both private and public construction spending.
Monday, 3 Aug. – Personal income and consumption (Jun.)
Personal consumption, nominal
IHS Global Insight: 0.2% Consensus: 0.2% Last actual: 0.9% (May)
Personal consumption, real
IHS Global Insight: -0.1% Last actual: 0.6% (May)
IHS Global Insight: 0.2% Consensus: 0.4% Last actual: 0.5% (May)
Core PCE inflation
IHS Global Insight: 0.1% Consensus: 0.2% Last actual: 0.1% (May)
Consumer spending likely increased 0.2% in June. Personal income is expected to have grown at the same pace as spending. Inflation-adjusted spending is likely to have fallen by 0.1%. Core PCE prices probably rose by 0.1%, keeping the core year-on-year inflation rate at 1.2%.
Monday, 3 Aug. – Construction spending (Jun.)
IHS Global Insight: 1.0% Consensus: 0.7% Last actual: 0.8% (May)
Construction excl. residential improvements
IHS Global Insight: 1.0% Last actual: 0.8% (May)
Construction spending is expected to have risen 1.0% in June on increases in both private and public construction.
Monday, 3 Aug. – ISM Manufacturing Index (Jul.)
IHS Global Insight: 53.0 Consensus: 53.5 Last actual: 53.5 (Jun.)
The ISM Index for manufacturing should cool by one-half a point. As the newly revised industrial production readings confirm, the decline in net exports is holding back goods manufacturing.
Wednesday, 5 Aug. – Trade balance (Jun.)
IHS Global Insight: -$44.0 billion Consensus: -$42.50 billion Last actual: -$41.9 billion (May)
The trade balance is expected to widen on a small drop in goods exports and an increase in goods imports.
Friday, 7 Aug. – Employment report (Jul.)
Nonfarm payrolls, change
IHS Global Insight: 200,000 Consensus: 225,000 Last actual: 223,000 (Jun.)
IHS Global Insight: 5.4% Consensus: 5.3% Last actual: 5.3% (Jun.)
Average hourly earnings
IHS Global Insight: 0.2% Consensus: 0.2% Last actual: 0.0% (Jun.)
The US economy is expected to add 200,000 jobs in July. Gains will likely be concentrated in healthcare, food services, and professional and business services. The unemployment rate should drift higher as the labor force increases.
by Patrick Newport and Manoo Sabety-Javid