Economic Notes – September 3, 2013


Written by: Jon McGraw

(-) Durable goods orders for July came in weaker than expected, falling -7.3% relative to a consensus forecast decline of -4.0%. Removing transportation from the headline figure, orders fell a much less dramatic -0.6%, but underperformed an expected +0.5% gain for the series. The difference was caused by a -52% decline in the volatile non-defense aircraft category—notably by a drop-off in Boeing aircraft orders. At the same time, core capital goods (notably in computers) fell over 3% and shipments were also weaker, so the report was generally a mild disappointment.

(+) The second release of the 2nd quarter’s GDP was a positive surprise, from an advance estimate of +1.7% last month to 2.5%. Consensus estimates anticipated a bump up (to +2.2% as a median forecast), but the underlying data was obviously even better. The improvements were led by stronger next exports (by +0.8%) and a slight improvement in inventories. The consumer spending portion was unchanged, however. As we look ahead to the current and fourth quarters of the year, it appears 1.5-2.5% remains the range of the general estimate, while 2014 continues to look potentially much stronger—as in the 3.0% and over range, per several economists—as post-recession repair (digging ourselves out of the hole) converts to productive ‘normal’ growth. Of course, there remains significant a divergence of views on this topic that run the gamut. On the more pessimistic side, demographic-based views point to a headwind in coming years due to the reversal of a ‘demographic dividend’ during the last few decades equating to roughly 1% in real growth—which would cause upcoming growth to struggle.

(-) The income and outlays report for July was disappointing, with personal income gaining only +0.1% for the month (half of consensus expectations). Core wages and salaries, which represent the majority of that number, fell by 0.3%—private wages dropped by slightly less than this, but government salaries dropped a bit more than the core figure, in part to defense furloughs during the month. Personal spending rose an identical +0.1%, which also underwhelmed versus expectations of +0.3% growth. Services spending stood out by weakening compared to other areas, as goods spending grew more similarly to trend. After all this, the personal savings rate was unchanged at 4.4%. Inflation figures, defined by the headline PCE and core PCE price indexes, both rose by +0.1% (half that of expected), which were barely meaningful, but in line with tempered inflation throughout.

(0) The Chicago PMI rose to 53.0 for August from 52.3 in July, which was right on par with expectations. In the underlying data, new orders gained several points, while employment and production ticked downward a few points. This bodes well somewhat for the broader ISM report this coming week, but regional indexes have been choppy over the last few months.

(+) The Richmond Fed index rose more than expected, to +14, versus an anticipated zero reading. In the underlying data, new orders, shipments and employment all rose, so the report was well-rounded. The supplemental service sector survey also gained relative to July in the areas of revenues, wages and demand. In addition, forward-looking expectations also improved.

(-) The Case-Shiller home price index gained +0.9% for June, a bit lower than the expected +1.0% reading and a similar disappointment when compared with other recent housing metrics that have experienced some deceleration in strong housing price gains as of late. The biggest gains for June were seen in Las Vegas, San Diego, San Francisco, Los Angeles and Miami (housing bust recovery areas—all up +1.5-2.5% on the month). Year-over-year, the Case-Shiller has retained a +12% increase, which remains quite robust despite recent tempering of growth.

(-) Pending home sales disappointed somewhat for July, with a -1.3% drop versus expectations of no change, so an indicator of slowing existing home sales a few months out from now. Declines were worst (around or just over -5%) in the Northeast and West, while the Midwest dropped a percent, and South actually gained +2.6%. Year-over-year, however, pending sales are up +7%.

(+) The Conference Board’s consumer confidence indicator rose to 81.5 in August (surpassing expectations of 79.0) to near post-recession highs, which was a factor of improvement in forward-looking expectations as well as a more positive labor differential, which compares job prospects in the spectrum of being plentiful vs. hard-to-get (it remained at -22, granted, but was better than last month).

(+) The final release of the Univ. of Michigan consumer sentiment index saw improvement to 82.1, from a preliminary number of 80.0 and expectations for 80.5—albeit below July’s 85.1. Most of this change can be attributed to an improvement in consumer assessments of current conditions, as well a slight improvement in optimism about the future. Unsurprisingly, two-thirds of consumers expect higher interest rates in the next year, which is a change from the ambivalence about rates over the past year. Inflation thoughts were also mixed, but remained tempered and in the usual 3.0% for shorter- and longer-term inflation (as they almost always are). As with many statistics, perhaps the most common behavioral predictor of the future is the known past.

(+) Initial jobless claims for the August 24 came in at 331k, which was just short of the 332k anticipated and no ‘special factors’ appeared to be convoluting the results. Continuing claims for the August 17 week came in at 2,989k, which was just above the 2,988k expected.

Market Notes

Later Monday and on through Tuesday, concerns over possible military action in Syria pushed markets lower—this affected sentiment all week.  As we’ve mentioned in the past, markets dislike uncertainty more than anything, and uncertainty here stems from a lack of credible alternative to the current regime situation (as bad as that might be), with Hezbollah and Al Qaeda in the wings to fill in a possible power vacuum.

Geopolitics aside, what this leads to are questions about regional stability as well as impact on oil production.  Syria is not a big global producer (300k barrels/day) but any extended war in the region could have an impact on shipping lanes and carryover to peripheral nations.  From an American standpoint, involvement in another Middle East conflict is certainly not the most popular choice, certainly during a period of upcoming government fiscal debate.

All S&P sectors lost ground on the week, but energy and utilities lost marginal amounts; financials and industrials lost more significant ground (the latter, -3%).  Small caps were hit a bit harder than large-caps, with an apparent beta effect kicking in.

Foreign emerging markets performed negatively as well, but nominally, ending up as the best performing equity asset class of the week.  Positive weeks in South Korea, Taiwan and Malaysia and nominal losses in China and Australia helped contribute.  Developed markets experienced an especially poor week with losses over 5% in Spain, Italy and Germany—the latter due to a poor retail sales report and of course the Syrian issue affecting everyone.

Bond prices retreated in keeping with the risk-off/flight to safety week.  With lower rates, longer Treasuries and corporates experienced the strongest positive returns, while most other categories were little changed.  The exception was foreign debt, while lost ground on the week with a stronger dollar.

Real estate returns were negative, but were led by U.S. mortgage and industrial/office with nominal negative returns.  European and U.S. residential issues performed worst, with losses around 2% on the week.

In commodity markets, crude oil moved up 3% early in the week with Syria concerns mentioned earlier, but pared back later in the week.  However, another factor not discussed as much over the last week was a series of labor strikes in Libya that disrupted port operations to the magnitude of up to half of all export capacity.  Brent crude priced in the U.K. ended up with twice the increases of WTI, due to the proximity and geographic importance of the area to Europe relative to the U.S.  In other contracts, soybeans and corn rose in price by several percent, while industrial metals like copper and zinc fell off by 3-5%.

Looking back at the month of August, it was a poor month for most all asset classes with the exception of commodities (which gained due with help from precious metals and crude oil) just in time to defy critics of diversification and contrarianism.  Have a great week!

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