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Economic signals last week were mixed, but the overall picture remains the same—a midsummer economy that is struggling to gain traction after an underwhelming first half. It was two steps forward in July and one step back in August. Yet, we can clearly distinguish the signals that point to a strengthening recovery as the year proceeds, especially in manufacturing. Flash PMIs retreated a little in August, but remained above the breakeven 50 mark, indicating continued manufacturing growth.
Advanced durable goods orders in July were solid. New orders grew 4.4 percent month over month, seasonally adjusted (SA). Excluding transportation, new orders increased 1.5 percent, and excluding defense, new orders increased 3.8 percent. Core capital goods orders (nondefense, excluding aircraft), a proxy for the private investment climate, grew 1.6 percent month over month, SA. Unfilled orders for manufactured durable goods fell 0.1 percent in July, and inventories increased 0.3 percent—a predictor of a possible softening in August.
Housing presented a somewhat cloudy picture, but overall was encouraging. July new home sales reached its highest level in nearly a decade, with 654,000 seasonally adjusted annual rate (SAAR) units sold in July. So far in the year, new home sales average 566,571 SAAR units, up 12 percent year over year. July existing home sales, on the other hand, fell 1.6 percent year over year. The median existing home price fell to $244,100 but is up 5.3 percent year over year. This is in line with the Federal Housing Finance Agency prices, which were up 5.6 percent year over year in June.
The second release of second quarter GDP by the Bureau of Economic Analysis revised the prior estimate of real GDP growth down by 10 bps to 1.1 percent quarter over quarter, SAAR. Downward revisions were made to state and local government spending and to private inventory investment. Imports, nonresidential fixed investment and personal consumption expenditures were revised upward. The advance report on international trade showed that the trade deficit was $59.3 billion in July, down $5.2 billion from a revised $64.5 billion in June. Goods exports for July were $122.8 billion, $2.9 billion more than June exports.
All in all, last week was uneventful as far as data releases go. But Federal Reserve Board Chair Janet Yellen addressed the Kansas City Federal Reserve’s Jackson Hole, Wyo., conference and indicated that the Federal Reserve was getting ready to raise the federal funds rate. Although yours truly does not believe that the rate hike will happen until December, it is an indication of the Federal Reserve’s growing confidence in the economic recovery. This week, we’ll be watching for reports on employment, U.S. car sales, personal income and spending, the Institute for Supply Management’s Purchasing Managers’ Index and construction spending.
Arun Raha, Ph.D., CBE
Vice President and Chief Economist