Real GDP Growth Disappointed in the Second Quarter

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The latest gross domestic product (GDP) numbers confirm that the U.S. economy remains mired in slower-than-desired growth despite recent signs of progress in some data points. Real GDP grew just 1.2 percent in the second quarter, well below the consensus estimate of 2.6 percent, with first quarter growth revised down to 0.8 percent. This release reflects a rebound in consumer spending, but there were significant drags on activity from fixed investment and inventories. Indeed, manufacturers and other business leaders continue to be quite cautious, and as a result, they are holding back on capital spending and hiring, waiting for better signs of traction in the economy.

The U.S. economy has averaged 2.2 percent growth annually since the end of the Great Recession, and with this release, real GDP is likely to expand by 1.8 percent in 2016. That would, however, suggest a better second half of the year, as real GDP grew just 1.0 percent at the annual rate in the first half. With that in mind, we need policymakers – especially in this all-important election year – to focus on pro-growth measures that will spur stronger activity. Read More

Advance Data for June: Goods Trade Deficit Widened, Retail Sales Inventories Grew

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The Census Bureau released advance statistics for a couple economic indicators for June, building off of its success in reporting preliminary figures on trade in recent months. Here is a run-down of some of the findings in this current release:

  • International Trade in Goods: The goods trade deficit widened to a four-month high in preliminary data, up 3.7 percent from $61.1 billion in May to $63.3 billion in June. This was largely the result of an increase in goods imports for the month, up from $180.2 billion to $183.5 billion, which outpaced growth in goods exports, up from $119.1 billion to $120.2 billion. Final data will be released on August 5. Note that the U.S. trade deficit is also assisted by a surplus in service-sector activity, which was $21.1 billion in May. Exports were mixed by category. Consumer goods (up $879 million), foods, feeds and beverages (up $558 million) and capital goods (up $381 million) each had notable gains, but there were reduced exports for automotive vehicles (down $416 million), industrial supplies (down $158 million) and other goods (down $184 million). Meanwhile, the largest increases for goods imports in June were for industrial supplies (up $2.1 billion), consumer goods (up $1.6 billion) and capital goods (up $564 million).
  • Wholesale and Retail Inventories: Wholesale inventories were essentially unchanged in June, up from $589.1 billion to $589.3 billion. Stockpiles for nondurable goods products were somewhat higher, up from $233.8 billion to $235.6 billion, but that increase was largely offset by reduced inventories for durable goods firms, down from $355.3 billion to $353.7 billion. At the same time, retail trade inventories grew 0.5 percent in June, up from $601.2 billion to $604.2 billion, boosted by strong gains at motor vehicles and parts dealers, up 1.0 percent from $208.2 billion to $210.3 billion. Excluding automobiles and parts, retail trade inventories were up 0.2 percent. Final numbers will be released on August 9.
durable goods

New Durable Goods Orders Fell Sharply in June on Reduced Aircraft Sales and Broader Weaknesses

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The Census Bureau said that new durable goods orders fell sharply in June on reduced aircraft sales and broader weaknesses. New orders dropped from $229.0 billion in May to $219.8 billion in June, a decline of 4.0 percent. Moreover, on a year-over-year basis, sales have decreased by 6.4 percent since June 2015. This highlights the ongoing challenges in the sector over the course of the past 12 months or more. With that said, much of the decline in activity in June came from lower nondefense and defense aircraft orders, down 58.8 percent and 7.4 percent for the month, respectively. Note that airplane orders can often be choppy from month-to-month, especially for nondefense sales, with transactions often centering around large trade shows. Excluding transportation equipment, new orders for durable goods were off by 0.5 percent in June, with 3.6 percent decreases year-over-year. This indicated broader weaknesses in the sector, even if the declines were more modest than the headline number suggests.

Looking more closely at the various durable goods sectors, the data were mostly lower in June. The exceptions were motor vehicles and parts (up 2.6 percent) and electrical equipment and appliances (up 0.8 percent), both of which notched some gains. Those increases, however, were not enough to offset declining new orders aircraft sales, as noted above, and for computers and electronic products (down 2.2 percent), primary metals (down 1.3 percent), fabricated metal products (down 0.3 percent) and machinery (down 0.1 percent).

Meanwhile, durable goods shipments increased by 0.4 percent in June, rebounding from the 0.3 percent decrease seen in May. Nonetheless, the higher figure in this release was boosted by motor vehicles (up 2.7 percent), with transportation equipment orders up 1.4 percent for the month. Excluding transportation, shipments of durable goods declined by 0.2 percent. Indeed, the sector-by-sector breakdowns were mixed, but mostly negative. Shipments fell for fabricated metal products (down 0.7 percent), machinery (down 0.4 percent), electronic equipment and appliances (down 0.2 percent), computers and electronic products (down 0.1 percent) and other durable goods (down 0.1 percent). Beyond automobiles, other segments with higher orders in June were communications equipment (up 6.0 percent) and (primary metals (up 0.8 percent).

Since June 2015, durable goods shipments have fallen 2.0 percent, with a decline of 3.2 percent when transportation equipment were excluded.

Richmond Fed: Manufacturing Activity Improved in July after a Weak June

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The Richmond Federal Reserve Bank said that manufacturing activity in its district improved in July after weakening once again in June. The composite index of general business activity rebounded from -10 in June, its lowest reading since January 2013, to 10 in July. Indeed, the underlying data recovered across-the-board in this report, including new orders (up from -17 to 15), shipments (up from -8 to 7), capacity utilization (up from -11 to 3) and the average workweek (up from -7 to 1). In addition, manufacturers in the region accelerated their employment growth (up from 1 to 6) somewhat. Each of these indices were encouraging. Yet, this report has been highly volatile so far this year from month-to-month, with the headline number ranging from -10 in June to 17 in March. Hopefully, the expansion seen in July can be sustained moving forward. Read More

Dallas Fed: Manufacturing Conditions Stabilized Somewhat in July, but Continued to Contract

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The Dallas Federal Reserve Bank said that manufacturing activity in its Texas district stabilized somewhat in July, even as sentiment has now contracted for 19 straight months. The composite index of general business conditions increased from -18.3 in June to -1.3 in July, bringing this measure closer to neutral territory. This shift was mirrored by better production (up from -7.0 to 0.4), capacity utilization (up from -9.3 to 0.3), shipments (up from -8.6 to 0.1) and capital expenditures (up from -2.1 to 4.8), with each index expanding slightly in July. As such, this release represented some progress for a state that has grappled with lower energy prices and the strong dollar over the past couple years. Read More

Markit: Manufacturing Sentiment Eased in Eurozone after Brexit Vote

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Interestingly, the last Markit survey’s responses on Eurozone manufacturing activity were due on June 23, the day of the “Brexit” vote for the United Kingdom to exit the European Union. In that survey, the Markit Eurozone Manufacturing PMI rose to a six-month high, with stronger data in most European markets, including Germany and the U.K. Suffice it to say, the surprise – at least for financial markets – decision for Britain to leave the European Union has shifted sentiment since then. In the latest survey, the Markit Flash Eurozone Manufacturing PMI fell to a two-month low, down from 52.8 in June to 51.9 to July, mainly on slowing new orders (down from 53.4 to 52.0). The composite measure, which includes the service sector, edged down from 53.1 to 52.9, its lowest level since January 2015 and off from 54.3 six months ago. Read More

value added

Manufacturing Added Less to Real GDP in the First Quarter than in the Prior Two Quarters

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As noted earlier, the U.S. economy grew by an annualized 1.1 percent in the first quarter, and the Bureau of Economic Analysis has now released data breaking out that growth by industry. In short, real value-added output in the manufacturing sector increased by 1.4 percent in the first quarter of 2016, slowing from 2.6 percent and 2.4 percent growth in the third and fourth quarters of 2015, respectively. As a result, manufacturers contributed 0.16 percentage points to headline growth in the first quarter, down from 0.31 percent and 0.29 percent in the prior two quarters.

Looking specifically at manufacturing in the first quarter, real value-added from nondurable goods firms rose 3.8 percent at the annual rate, but durable goods manufacturers saw output decline by 0.6 percent. Therefore, durable and nondurable goods businesses contributed -0.04 percent and 0.2 percent, respectively, to real GDP for the quarter. Read More

Philly Fed: Manufacturing Activity Improved Despite another Contraction in the Composite Index

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The Federal Reserve Bank of Philadelphia said that manufacturing sentiment in July contracted for the third time in the past four months (or the ninth time in the past 11 months). The composite index of general business activity declined from 4.7 in June to -2.7 in July. It is likely that post-Brexit worries negatively impacted assessments about the broader economy. Despite a decrease in the headline number, many of the underlying data points improved for the month. For instance, both new orders (up from -3.0 to 11.8) and shipments (up from -2.1 to 6.0) returned to expansion territory in July, which was encouraging. Indeed, the percentage of respondents suggesting that orders had increased for the month rose from 20.6 percent in June to 27.6 percent in July, with those noting declining sales dropping from 23.6 percent to 15.8 percent. Read More


Housing Starts Rise to a Three-Month High in June

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The Census Bureau and the U.S. Department of Housing and Urban Development said that new housing starts rose to a three-month high in June, recovering a bit from a springtime lull. New residential construction activity increased from an annualized 1,135,000 in May to 1,189,000 in June. This was not far from 1.2 million units, a threshold that the market seems unable to maintain of late. Nonetheless, I would expect 1.21 million housing units started by year’s end. Indeed, residential construction remains one of the brighter spots in the economy, and builders remain mostly upbeat about the next six months, according to the National Association of Home Builders. With that said, housing starts were off 2.0 percent over the past 12 months, mainly from volatility in the multifamily segment. Single-family starts were more indicative of recent strength, up 13.4 percent year-over-year.

In this report, both single-family (up from 745,000 to 778,000) and multifamily (up from 390,000 to 411,000) starts data were higher in June. New single-family residential construction activity grew at its fastest pace since February, and they continue a slow-but-steady trend higher. Single-family housing starts have averaged 776,333 year-to-date in 2016 through June, up from 675,833 for the same time frame in 2015. At the same time, the multifamily starting pace represented a nine-month high, with these figures experiencing large swings from month-to-month. The year-over-year comparison was skewed by an outsized gain in activity in June 2015 to 527,000 units. If you exclude that outlier, multifamily starts rose from an average of 368,800 through the first 5 months of 2015 to an average of 379,167 in the first half of 2016.

Meanwhile, housing permits increased from 1,136,000 to 1,153,000, a four-month high. Permits were slightly higher for both single-family (up from 731,000 to 738,000) and multifamily (up from 731,000 to 738,000) units. Permits are often a proxy for future activity, and in that light, the gain was somewhat encouraging, even if we might prefer faster growth. Much like the housing starts numbers, the year-over-year data were off sharply, down 13.6 percent from 1,334,000 housing permits in June 2015. The prior year’s permitting rate was skewed by strong multifamily activity, as noted above. Excluding that figure, growth in permits has been essentially unchanged, up from an average of 1,140,400 in the first 5 months of 2015 to 1,141,000 in the first half of 2015.

Consumer Prices Increased for the Fourth Straight Month, Lifted by Higher Energy Costs

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The Bureau of Labor Statistics said that consumer prices rose 0.2 percent in June, matching the gain seen in May. It marked the fourth straight monthly increase in consumer costs. Higher energy costs have helped to buoy these growth in consumer prices over that time frame, up 1.3 percent in June alone.  With that said, energy prices have declined over the past year as a whole, down 9.4 percent, and they have generally helped to keep a lid on larger pricing pressures over that time frame. Food costs have also quite modest over the past year, up just 0.3 percent since June 2015, which has helped. In June, food prices were off by 0.1 percent, with costs lower for meats, dairy and fruits and vegetables. On a year-over-year basis, the consumer price index increased 1.1 percent, unchanged from the pace seen in the prior two releases but accelerating from 0.7 percent six months ago. Read More