Economic Perspective – August 2012

• Federal Reserve Chairman Ben Bernanke said the Fed is ready to supply fresh economic support if needed, but stopped short of promising specific additional measures at the Federal Open Market Committee’s September 13 meeting. Meanwhile, Spanish and Italian bond yields eased a bit, though there was little concrete follow-up to European Central Bank President Mario Draghi’s promise to do whatever it takes to preserve the euro.
• The U.S. economy grew at an annual rate of 1.7% in the second quarter rather than the 1.5% previously estimated by the Bureau of Economic Analysis. That’s slightly higher than previously thought, but also slightly lower than Q1’s 2% growth. Corporate after-tax profits were up 1.1% from the previous quarter, and 3.3% higher than a year ago.
• The U.S. economy added a net 163,000 new jobs. According to the Bureau of Labor Statistics, that’s a bit higher than the 151,000 monthly average for 2012. The private sector added 172,000 jobs, while government employers cut roughly 9,000 positions. However, because more people once again sought work and were therefore counted in the statistics, the unemployment rate edged up from 8.2% to 8.3%.
• Falling energy prices helped keep inflation in check; both the annual consumer and wholesale inflation rates continued to slow, hitting 1.4% and 0.5% respectively. However, the summer’s widespread drought led the U.S. Department of Agriculture to cut its estimate of the nation’s corn crop by 17%. That would make the fall harvest the worst in nearly two decades and potentially increase the price of corn used in processed foods, as livestock and poultry feed, and as the fuel ethanol.
• Slower Chinese manufacturing growth led to speculation that there might be additional efforts to stimulate the economy there. There also were signs of slower growth in Germany, the eurozone’s key economic driver. Meanwhile, U.S. manufacturing data was mixed; the Federal Reserve said industrial production was up 0.6% and utilization of the nation’s manufacturing capacity hit its highest level since April 2008. However, contraction was seen in both the Institute for Supply Management’s manufacturing survey and in several of the Fed’s regional divisions.
• The housing market began to show signs of life. Sales of new single-family homes rebounded 3.6% in July, putting them 25.3% higher than July 2011, according to the Commerce Department. The National Association of Realtors® said home resales also went up 2.3% in July and were 8.6% higher than last July, while housing starts fell 1.1% after a 6.8% increase during the previous month. Finally, home prices saw improvement; the year-over-year change in the S&P/Case-Shiller 20-city index (+0.5%) was positive for the first time in almost two years, with a 2.3% gain for the month putting prices 6% higher than the recent low seen in March.
• Consumer spending, which accounts for an estimated 70% of the U.S. economy, saw its biggest monthly increase since February (0.4%), but the Commerce Department said the increased spending outpaced the 0.3% gain in income. Retail sales also were up 0.8% in July; the first increase in four months put them 4.1% higher than a year ago.
• Sixteen years after it almost went bankrupt, Apple became the largest U.S. company in history as its market cap hit $623.52 billion.
• In its semiannual budgetary report, the nonpartisan Congressional Budget Office said that scheduled tax increases and federal spending cuts would likely push the U.S. economy into recession next year, cutting real GDP by 0.5% and pushing the unemployment rate to more than 9% by December 2013. Even without the changes, the CBO forecast a relatively sluggish 1.7% increase in GDP and a continued 8% unemployment rate.

Eye on the Month Ahead

Light summer trading volumes will likely be replaced by traders’ efforts to position themselves for the end of the quarter. A German court’s ruling on the country’s participation in Europe’s bailout mechanism, currently anticipated to be announced around September 12, could affect investor sentiment; so could a report on the stability of Spanish banks. Investors also will keep an eye on the September 13 Fed announcement to see if additional economic stimulus is on the horizon.