Economic Perspective – Aug 2013

• The U.S. economy grew more than previously thought in the second quarter, according to the Bureau of Economic Analysis. The 2.5% annualized growth in gross domestic product is substantially higher than either the initial estimate of 1.7% or Q1’s 1.1% growth. An 8.6% increase in exports and imports that were lower than previously thought were the biggest factors in the GDP revisions. Business investments were up 9.9% and corporate profits rose 2.6%, while the federal sequester budget cuts contributed to a 0.9% decline in government spending. Though another revision is due in late September, this is the last GDP report before the Fed’s next monetary policy meeting.
• The unemployment rate fell to 7.4% in July, its lowest level since December 2008. However, the 162,000 jobs added to the nation’s payrolls during the month were far less than the 189,000 jobs averaged over the last year, and the Bureau of Labor Statistics said part of the unemployment rate’s decline from June’s 7.6% resulted from some discouraged workers leaving the workforce.
• Freddie Mac said the rate for a 30-year fixed mortgage continued to push upward, hitting a two-year high of 4.58%. Higher mortgage rates may have helped spur home resales in July, but they didn’t seem to do the same for sales of new homes (the reverse was true in June). The National Association of Realtors® said sales of existing homes were up 6.5% for the month, but the Commerce Department reported a 13.4% drop in new homes sales. In the cities measured by the S&P/Case-Shiller 20-city index, home prices continued to rise, but at a slightly slower pace; June’s average 2.2% gain put prices 12.1% ahead of last June. In new residential construction, the Commerce Department said construction of single-family homes slumped 2.2% in July. However, increased construction of apartment buildings helped push up housing starts by almost 6% for the month, and building permits–an indicator of future activity–rose 2.7%.
• Led by higher costs for housing, gas, clothing, and fruits and vegetables, consumer inflation rose 0.2% in July. That’s less than June’s 0.5% increase, and the Bureau of Labor Statistics said wholesale prices remained steady. The annual consumer inflation rate is now at 2%, while annual inflation at the wholesale level is 2.1%.
• Slower car sales hurt July retail sales, though the Commerce Department said overall retail sales still rose 0.2%. Meanwhile, the 0.1% increase in both consumer spending and personal incomes was less than in June, according to the Bureau of Economic Analysis.
• U.S. manufacturers saw accelerating growth in July, according to the Institute for Supply Management’s gauge of manufacturing activity, which rose from June’s 50.9% to 55.4% (the highest reading of the year). Meanwhile, the ISM’s index for the services sector soared to 56% from the previous month’s 52.2%. The Federal Reserve’s measure of industrial production was unchanged in July, though the Commerce Department said business productivity rose at an annualized rate of 0.9% during the second quarter.
• The Federal Open Market Committee decided not to cut its bond purchases in August, citing the potential threat of rising mortgage rates to the economy. However, the decision did little to calm speculation that the $85 billion a month now being spent might be reduced as early as September.
• China’s Customs Administration said imports into the world’s second-largest economy were up 11% from the previous July, while exports rose 5.1% over the year. In the United States, lower imports and higher exports cut the U.S. trade deficit by more than 22% in June to its lowest level since October 2009.
• A “flash freeze” attributed to a technical glitch left Nasdaq-traded securities in limbo for more than three hours on August 22. Also frozen was US Airways’ proposed acquisition of American Airlines, as the Justice Department filed an antitrust suit seeking to block the merger that would create the world’s largest airline. The Justice Department, along with the Securities and Exchange Commission, also filed civil charges of fraud against Bank of America, alleging that the bank deliberately sold residential mortgage-backed securities without fully disclosing the risks involved in the underlying loans.

Eye on the Month Ahead

September could be an eventful month for financial markets. The 800-pound gorilla is the September 18 Federal Open Market Committee meeting announcement; speculation that Fed bond purchases could be reduced at that meeting has driven bond yields up and some emerging-market currencies down in recent weeks. Renewed congressional rancor over budget deficits is likely to reappear as another deadline for raising the nation’s debt ceiling approaches. Overseas, German Chancellor Angela Merkel is considered likely to be reelected, but a defeat would heighten global anxiety about the eurozone’s financial stability. In Japan, a decision is scheduled on whether to implement a scheduled 3% consumption tax increase next April. Coupled with continued turmoil in the Middle East and the mid-month quadruple witching options expiration, such events could keep traders on high alert for much of September.

Source: Broadridge