Economic Notes: June 30, 2014


Written by: Jon McGraw

  • Economic data was mixed, but survey responses showed stronger positive sentiment and housing appears to show some improvement.  The final 1st Quarter GDP release was amended downward, but this was largely blamed on weather effects and appears to be reversing for the current quarter.
  • Equity returns were generally negative on the week, as the negative GDP report and Iraq situation weighed on sentiment.  In more typical risk-off fashion, bond returns were higher on lower yields across the globe.

(-) The third/final estimate for 1st Quarter GDP came in a lot worse than expected, showing a contraction of -2.9%.  Obviously, this was a deterioration from the initial and second estimates of -0.1% and -1.0%, respectively, and worse than the expected -1.8% final figure.  The downgrade was almost exclusively due to additional weakness in consumer spending in healthcare (-1.2%, two-thirds of the total contribution) and net exports (-0.6%).  A result this poor is actually unprecedented outside of recessionary periods, which again reminds us how severely the winter weather affected things (unprecedented at least since 1947 when modern quarterly government stats were developed, as there has never been a GDP decline of over -1.5%, except for right before or during a recession).

The weak quarter has been attributed to those redundantly discussed weather effects, for the most part, with some Affordable Care Act components.  Acting under the assumption the poor quarter is a temporary aberration, the typical and hoped-for relationship is that goods/services not consumed but postponed during the poor quarter will be pushed ahead and consumed in Q2—the rationale many economists have for a higher figure.  At the same time, it would not be surprising to see continued ‘growing pains’ from treatment, measurement and side effects of the ACA; the full portion of which may take some time to filter through the entire economy over the next several years.  A few more bearish commentators are using this quarter as an ‘I told you so’ moment to reinforce the theme that the underlying economy isn’t as strong as we’d like to believe.  The slow growth seen in prior quarters is certainly the backdrop for that view, although more recent survey, production and employment results have pointed to improvement—how much improvement will be the issue.  On the brighter side, expectations for this quarter’s GDP generally fall in the 3.5-4.0% range, but we’ll have to wait until the end of July for that initial figure.

(-) Durable goods orders came in weaker for May, down -1.0% compared to a consensus forecast of no change.  Volatile defense orders fell by almost a third and non-defense aircraft also dropped several percent, which trimmed the ex-transports figure to -0.1%.  Arguably the most important component (since it’s used in the equipment part of the GDP report), core orders, rose +0.7%, which beat expectations by a few tenths.  Core shipments also rose +0.4%, about half of the level expected and manufacturing inventories grew a percent.

(0) Personal income/spending for May was a bit weaker than expected overall.  Income grew +0.4% in line with wage/salary growth, as expected, while spending grew only half as much, growing +0.2% (although the 12-month growth number, at +3.5%, is the best in several months).  The Affordable Care Act has thrown a wrench into some of the accounting expectations, adding +2% to transfer receipts (part of non-wage income), but some of the spending appears to be due to some inconsistencies with how the government is accounting for these healthcare purchases, so this particular month may not be as worthwhile a sample.  After all this, the personal savings rate rose to 4.8%.  The headline and core PCE price indexes rose +0.2%, which was largely in line with expectations, representing year-over-year gains of +1.8% and +1.5% respectively—similar to other inflation measures.

(+) The Markit manufacturing PMI survey rose from 56.4 in May to 57.5 in June, which exceeded the forecast of 56.0.  Strength was seen in new orders and output, both up several points, while employment was just above flat.  Input and output prices both moved up, in keeping with recent inflation reports that are firmer than previous.  The Markit services PMI rose to 61.2, sharply outpacing the forecast of 58.0, and featured gains in new business and employment.  Both reports are solid, and have proven to be among the better estimates of activity in recent years.  Markit is a private U.K-based firm that provides global industrial surveys among other work, and whose U.S. survey is gaining traction on the traditional well-known version supplied by the Institute of Supply Management (ISM) since the late 1940’s.  A few global investment firms offer a similar survey, with a few tweaks based on the proportion of what they think is most important (new orders, deliveries, inventory growth, etc.) all in an attempt to hash out this data in the most timely way possible, but all of these are showing significant improvement in recent months.

(-) The S&P/Case-Shiller index rose a flattish +0.2% for April, which significantly underperformed the +0.8% gain expected.  In fact, it was the slowest monthly rate of increase in two years.  The more solid city reports were Boston, Detroit and Minneapolis, which exhibited 1-2% gains.  This brought the year-over-year index figure to a +11% gain, which is not terrible by any means.

(-) Similarly, the FHFA home price index was flat for April, underperforming the anticipated gain of +0.5%, and bringing the 12-month gain to +5.9%.  Of course, this index differs from the Case-Shiller in that it also includes regions outside the 20-city urban group and represents homes financed with certain government agency mortgages.  Weaker numbers in New England as well as Texas/Louisiana (-1% for both regions) represented the worst performances.

(+) Existing home sales rose a bit more than expected for May (+4.9% versus consensus of +1.9%), which was good news for a recently choppy housing market.  Single-family homes gained +6% to 4.89 mil. annualized units, and were responsible for the increase, particularly in the South; condos/co-ops were generally unchanged during the month and inventories rose +2%.  While better, the result is still -5% below where it was a year ago.

(+) New home sales also gained sharply, up +18.6% for May, versus expectations of a modest +1.4% increase, and moved to a new recovery high of 5.04 mil. annualized units.  The gains were generally seen nationwide, as NE, South and West were higher, while the Midwest results were flat.  Inventories were unchanged, and there appear to be signs of stronger activity here in response to stronger sales catalysts.  The homebuilding industry tends experience a bit of a momentum component compared to other industries—the stronger the homes sales pace, the more builders jump on the bandwagon.

(+) The Conference Board consumer confidence index for June rose to a post-recession high of its own to 85.2, up from last month and surpassing expectations of 83.5.  Consumer assessments of their present situation and future expectations both grew by several points, as did the labor differential (jobs more plentiful), so good news all the way around.

(+) The U. Michigan consumer sentiment measure rose 1.3 points, to 82.5, from the preliminary to the final estimate (consensus called for 82.0).  From the survey results, household assessments of the current situation and future expectations both rose over a point in improvement, while inflation expectations moved upward a tenth of a point (just above the consistent long-term average of 3%).

(+) From the prior week, the Conference Board’s index of leading economic indicators rose +0.5% in May, representing the 4th consecutive gain.  The series showed broad-based strength in interest rate conditions, jobless claims and manufacturing hours, while the building permits segment weighed on net gains.  The coincident and lagging indicators also rose +0.3% and +0.4%, respectively.

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