Here is the summary of this week’s Monday Economic Report:
Two events last week spooked financial markets around the world—one stemming from comments from the Federal Reserve Board and the other a realization that China’s economy was slowing. The Federal Open Market Committee (FOMC) left its current expansionary policies in place, including continuing to purchase $85 billion in mortgage-backed and long-term securities each month. Yet, the FOMC left open the possibility that these asset purchases would be reduced starting later this year, a point echoed by Federal Reserve Board Chairman Ben Bernanke in a press conference. A possible “tapering” of quantitative easing could happen, according to the Fed, because the U.S. economy has improved in recent months, and the Fed increased its economic forecasts for the next two years. It expects real GDP growth of between 2.3 percent to 2.6 percent this year, with the economy expanding by 3.0 percent to 3.5 percent in 2014. On the inflation front, pricing pressures are expected to stay below the Fed’s goal of 2.0 percent, something the latest consumer price data affirmed.
The other headline last week was growth in China, with manufacturing activity contracting for the second consecutive month. The HSBC Flash China Manufacturing Purchasing Managers’ Index (PMI) has declined from 50.5 in April to 49.6 in May to 48.3 in June. Index readings under 50 signify contraction in activity. Falling demand for new orders and exports fueled the index’s decline in June. At the same time, there are media reports that Beijing is dealing with credit concerns that could dampen its growth, possibly averting a bubble in credit markets. The fear that China might have a credit crunch combined with the Federal Reserve’s easing of its asset purchases (ending by mid-2014, according to Bernanke) sent equity markets sharply lower on Wednesday and Thursday last week, closing down 3.4 percent between Tuesday and Friday.
Despite these developments, the Markit Flash U.S. Manufacturing PMI edged higher, up from 51.9 in May to 52.2 in June on modest increases in new orders and output. Exports were lower, however, and hiring was essentially flat. Two other manufacturing sentiment surveys released last week showed mixed results. The Philadelphia Federal Reserve Bank reported that activity rebounded in June, with various production measures shifting from contraction to decent growth for the month. Employment activity remained stalled. Respondents were cautiously optimistic about the next six months, much as they were in the New York Fed’s Empire State Manufacturing Survey. That survey, however, found manufacturing activity still contracting, even as the overall perceptions measure on the current business environment improved.
Housing continues to be a bright spot. New residential construction rose 6.8 percent in May, continuing an upward path that has led to 28.6 percent gains over the past 12 months. These increases were among both single-family and the more volatile multifamily units. Meanwhile, housing permits—a proxy of future construction activity—fell back to Earth, having surpassed the 1 million mark for the first time in almost five years the month before. Nonetheless, permitting is up 20.8 percent year-over-year, and the figure still points toward increased residential construction in the months ahead. With that in mind, the National Association of Home Builders (NAHB) reported that home builder confidence reached its highest point since March 2006, with single-family sales expected to pick up in the second half of 2013.
This week, we will learn more about the state of manufacturing, with preliminary durable goods orders data from the Census Bureau for May and regional Federal Reserve Bank surveys from Chicago, Dallas, Kansas City and Richmond. In addition, there will be a second revision of first quarter real GDP (which is not expected to change much beyond the 2.4 percent gain estimated earlier), and the latest consumer confidence data will be released.
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