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Your Bank > News

CNB Economic Comments September 8

September 11, 2017

To: Everyone
From: Gregory S. MacKay, Economist

The best news in the past couple of weeks was the second estimate of second quarter GDP growth. It was revised upward to 3% from the first estimate of +2.6%, making this the first quarter since early 2015 to meet or surpass 3% growth. We had been somewhat concerned with personal spending since the first quarter growth was a meager 1.9%. Second quarter personal consumption rose at a 3.3% rate, the best showing in a year. Consumer spending on both durable and non-durable goods advanced nicely, with the exception of auto sales. Business spending also increased nicely, up 3.6% over the abysmal -1.2% recorded in the first quarter of the year. While gains in business spending slowed for residential and non-residential structures, there was strong equipment spending and the decline in inventory buildups stopped, suggesting companies were aware of better consumer sentiment.

Consumers did remain generally upbeat for the month of August. Both major consumer confidence surveys remained solidly positive, with just a bit of wavering between current and short term expectations. Both surveys were conducted before Harvey and Irma. After a weak income showing in June, July’s inflation adjusted disposable personal income rose a modest .2%, and inflation adjusted personal consumption expenditures rose .2%, mirroring June’s advance.

August job data continued to stress the relatively full level of employment in the U.S. Job gains were a modest 156,000, and unemployment ticked up a tenth, as the labor force grew by 77,000 people and people employed fell by 74,000. The job gains were encouraging, as higher paying construction and manufacturing jobs almost matched slowing service job growth. There were substantial slowdowns in hiring of health care and social assistance and leisure and hospitality positions.

Good news continued on the inflation front. The Fed’s favorite inflation index – the Personal Consumption Expenditure Price Index – roses a miniscule .1% in July, as did the index excluding food and energy. Both the PCE and core PCE have risen only 1.4% from year ago levels. Add in the GDP deflator, which rose a mere 1.0% annualized in the second quarter, and we’ll suggest that we may see some lowering in anticipated medium term inflation expectations coming from the FOMC meeting on September 19-20. It’s going to be hard for the inflation “hawks” to continue to press for hikes with inflation levels this muted.

Business indicators remain firmly moderate. The latest “Beige Book”, or Summary of Commentary on Current Economic Conditions, in the 12 Federal Reserve Districts continues to summarize economic growth as “modest to moderate,” citing non-auto retail sales and tourism as strengthening. Manufacturing was better, with the exception of autos, agriculture was mixed, capital spending was better “in some Districts,” and business and consumer loans grew “moderately.” Employment’s slower growth was pegged as caused by the tight labor markets, and business leaders saw some “modest” price increases for materials. Surveys done by the Institute for Supply Management for both the manufacturing and non-manufacturing components of the economy continue to see economic growth picking up its growth pace.

Our only concerns as of this writing are the weather and Washington. While too early to tell the whole effect of Harvey, Irma and whatever else is out there, some short term drag on economic results for the third and fourth quarters is likely. There will be skewed data on everything from inflation to employment numbers, but the human toll is inestimable. Our prayers and sympathies go out to all affected by these storms. As of this writing, Congress has “kicked the can” down the road until December 8 on government funding. A series of “continuing resolutions” will keep the government operating until then. December could provide a “Battle Royale” in Congress, as a more permanent solution to government funding becomes just one of the ping pong balls along with tax cuts, the Deferred Action and Childhood Arrivals Act (DACA) and the Wall to be acted upon by Congress. Stay tuned.

Stock prices are beginning to recover from mid-week lows on the news of the federal spending package, and still remain in double digit gains for the year. At 1:03 p.m., for the week and year:

Index 09/08/17 Weekly Change Year-to-Date Change
Dow Industrials 21828 -0.7% +10.4%
NASDAQ 6376 -0.9% +18.4%
S&P 500 2465 -0.4% +9.2%

Both Treasuries and munis are showing slightly lower yields as a result of a little nervous weather buying.

Return Period
U.S. Treasuries Municipal Bonds
09/08/17 08/25/17  09/08/17 08/25/17
2 year 1.27% 1.33% 0.84% 0.87%
5 year 1.65% 1.76% 1.10% 1.15%
10 year 2.06% 2.17% 1.79% 1.87%

Please keep those affected by the weather in your thoughts and prayers.