From: Gregory S. MacKay, Senior Vice President & Chief Economist
First quarter GDP growth was revised downward to +1.1% from +1.8%, so the advance estimate of second quarter growth of +1.7% suddenly looks good. We talked last week of a possible “soft patch” in GDP growth. With the release this week, there has been substantial improvement in growth since the fourth quarter 2012’s anemic .1% increase suggesting we’re past any probable downturns in the rate of growth. Looking into the numbers, there was good growth (+1.8%) in personal consumption expenditures, but the gain was lower than the 2.3% increase in the first quarter. Business expenditures increased 9%, almost doubling the first quarter growth as nonresidential structures and equipment had large gains. Residential construction also gained a bit, as did inventories, but exports remain a slight drag on growth, as export increases did not offset import increases. Government spending fell .4% from the past quarter, but that is the smallest decrease in three quarters. We won’t use this advance look at GDP as anything more than a reasonable expectation that the expansion continues at a modest pace. Meeting 2012’s growth of 2.8% looks tough, with the 2002-2012 average of +1.8% more likely to be topped slightly by better third and fourth quarters.
“Modest” growth is the term used by Fed Chairman Bernanke in the press release after this week’s FOMC meeting. The release was widely anticipated to suggest a clearer picture of Fed direction in terms of its bond purchase program. The release seemed to suggest that growth was less than expected by Fed members, possibly because of recent increases in mortgage rates and ongoing fiscal restraint. The release went on to say “economic growth will pick up from its recent pace… with appropriate policy accommodation”. This was less positive than prior statements that “economic growth will proceed at a moderate pace”. The release went on to say that the Committee “reaffirmed its view that a highly accommodative stance of monetary policy will remain appropriate for a considerable time…”, further separating and distinguishing the two monetary tools in use: asset purchases and short term interest rates. Opinion remains split on the meaning of this message. We don’t see where this release advanced a possible late fall date for the “tapering” of Fed bond purchase. By mentioning mortgage rates, the Committee is acknowledging that unusual market pressures will be felt when the tapering begins. Our best guess is that the amount of tapering to be done will be more fully addressed soon, and an early autumn start is unlikely without substantially better numbers soon.
Let’s not forget the current 800 pound gorilla in the room. The unemployment picture is continuing to improve, but not at any kind of robust pace. Non-farm payrolls rose 162,000 in July, and May and June were revised downward. Most of the growth was in services, with retail, professional, and leisure making up two-thirds of the growth. Government jobs declines have slowed. There was small growth in motor vehicles which overshadowed losses in construction. Weekly earnings continue to struggle to top inflation, increasing 1.5% since July 2012. The best news in the report is that the number of unemployed is down 1.2 million since last year, with much of that number being job losses. Simply put, layoffs are declining at a reasonable pace, giving current workers a better feeling. There still needs to be work done on new entrants and reentrants, which total about 4.5 million workers, or about the same as last year. But some writers are going to concentrate on the decline in unemployment to 7.4% as a positive. It’s hard for us to think that way, as it was reached not by good job growth but by a decline in the labor force.
So we’ve had a neutral to slightly cautious FOMC statement, modest GDP growth, and a fair employment report. Not a bad week – except that we’re four years into an expansion that still seems to need Fed support. Personal income and expense levels for June and consumer confidence levels in July say the consumer remains convinced that the economy is improving, but the fiscal drag and a possible jolt to the housing expansion remain in our minds.
Stock prices are cautiously higher this week, as many strong corporate earnings reports are bolstering investor confidence again. At 1:30 p.m., for the week and year:
Treasury bond traders pushed yields down this morning after the jobs report, but yields on 10 year and longer bonds remain above last week. Muni yields remained in recent trading ranges.