From: Gregory S. MacKay, Senior Vice President & Chief Economist
Most of the discussion among business writers over the past month has centered on the subject of a FOMC change in policy regarding bond purchases. The minutes of the June meeting suggested to some that a decline in purchases was soon forthcoming. Bond yields shot upward and mortgage rates jumped a full percentage point. Various FOMC members then spent the next several weeks re-explaining their position that more or less bond purchasing may be done based on incoming economic data.
This leads me to the secondary thought of whether a “soft patch” in the economic expansion will occur this year. In 2011, economic growth slowed between the second and third quarters, while in 2012, growth slowed between the first and second quarters. There has been some speculation that second quarter 2013 growth will be slower than that of the first quarter (+1.8%). If so, the suggestion that the FOMC will begin to taper its purchases of bonds as early as September is off base. Only some kind of growth rate in excess of 2.4% in the second quarter is likely to trigger the kind of unemployment numbers that some writers believe will cause the Fed to slow its purchases.
A quick look at some second quarter numbers does not lead me to believe that GDP growth will be all that robust. Consumers just took the month of June off. Retail sales (without autos) were flat, with falling sales in important items like electronics, building supplies, and restaurants. There was only a .4% increase in retail (without auto) sales for the second quarter over the first quarter, as declines in gasoline prices during the second quarter did not translate into higher sales of other items. Motor vehicles remained the item of choice for consumers during the past year, but these sales will not be enough to give second quarter GDP a good boost.
A similar view of the housing market is evident. Both housing starts and building permits fell a bit in June. I’m not concerned about a trend here, as start levels are still 10.4% above June 2012 levels and permit levels are 16.1% above June 2012 levels. Most of the decline lately has been in multi-family units. Single family permits and starts are holding well, but the decline in multi-family signals a little slowdown in the overall addition to GDP by housing. Existing home sales also dropped a bit in June, as higher mortgage rates took a few buyers by surprise. However, prices remain firm, foreclosures are shrinking, and I expect the existing home market will strengthen again in the third quarter. New home sales in June showed no weakness, up 38% from year ago levels, solid price increases, and a low supply level.
I’m a little more concerned with employment numbers. New unemployment claims have struggled to stay below 330,000, and are currently running around 345,000. Good long term numbers need to be below 300,000. There is some good news in continuing claims, which have fallen by some 300,000 in the past year. The labor force is growing as recent grads and people reentering the job market have pushed up the job seekers. Job creation of 170,000 – 200,000 per month is helpful, but will not put needed “zip” into GDP growth.
The good news remains inflation. While the June Consumer Price Index rose .5%, the rate was only 1.8% for the past year. The annual rate without food and energy was 1.6%, a number well below FOMC worry levels. A shift in energy prices increased the Annual Producer Price Index increase to 2.5% in June, but that level is already receding. There just isn’t any bad news to be found in the inflation numbers.
Global conditions remain mainly neutral to my forecast. While GDP in the UK looks better, most of the other nations need stimulus to break out of a negative trend. China is meeting lower GDP forecasts. It doesn’t seem that our export business will be much of a help to GDP in the second quarter or second half of the year.
So the numbers aren’t there for any Fed changes anytime soon, nor should there be much of a “soft patch” in the economy. All ahead slow remains the course.
Stock prices were mixed for the week, with the NASDAQ posting a reasonable gain. At the close, for the week and year:
Treasury bonds saw a small increase in 5-10 year yields, and longer municipals followed suit.