A look behind at the August 26 week saw most of its excitement in the war of words between the US and China on trade policy. What started off the week as an escalation that walked back the decision to hold off on further tariffs with Chinese goods until December and promises of a proportionate retaliation by China, ended with China declining to immediately impose their own tax on imported goods. This leaves significant uncertainties on the horizon for trade but also a slightly more positive outlook for negotiations when they resume in September.
The economic data was something of a mixed bag. Some of the headlines that looked good on the surface were only so-so upon closer inspection of the details. In other cases, a report that had a soft tone was not at all bad when taken in context. However, none of it suggest that growth is set to rebound in the third quarter and there are plenty of indications that it will not take much for the economy to drift into a downturn.
The second estimate of second quarter GDP put growth at 2.0%, a scant downward revision from the 2.1% in the advance report. However, the composition of growth was for greater personal consumption against lower investment, more drag from net exports, and less support from the change in inventories. Unless investment picks up, it may be that consumption is going to have to carry the expansion in the third quarter.
The July numbers on personal income were lackluster, but spending was solid with gains in all three categories – durables, nondurables, and services. The PCE deflator was up 1.4% compared to July 2018, and the core PCE deflator was up 1.6%. Neither of these readings suggest that inflation is near the Fed’s 2% objective. There is debate among FOMC participants as to whether the PCE deflator is accurately reflecting underlying inflation at the moment given the behavior of the CPI and other inflation measures. However, it also gives the FOMC a justification for providing additional interest rate accommodation at the September 17-18 meeting, should the debate go in that direction.
Part of what is driving consumers’ relative optimism and willingness to spend is rising incomes and abundant jobs. The Conference Board’s Consumer Confidence Index lost little ground in August at 135.1 after 135.8 in July in spite of increased concerns about a recession. The labor market helped bring the present conditions component to a high not seen since the 2000’s even as expectations for six months from now softened. The University of Michigan Consumer Sentiment Index fell to 89.8 in its final August reading, down from 98.4 in July and its lowest since October 2016. The report noted that the 8.6 point drop in confidence is the largest since the 9.8 point decline in December 2016 on the eve of the so-called “fiscal cliff”. The two surveys ask different questions, and at times can diverge. Right now it looks like it is jobs and income that are keeping the Conference Board measure high, while Michigan is more worried about deterioration in business conditions and growth. In the case of the latter, the reading may prove to be an outlier. If not, it could mean that consumers are going to be more wary about spending going into the critical holiday shopping season.
New orders for durable goods turned in an upside surprise with the 2.1% gain for July. However, that was concentrated in a jump in aircraft orders in the transportation component. Excluding transportation, orders were down 0.4% reflecting broad softness across other sectors.
Hope for a rebound in the factory sector looked slim after the release of the regional surveys of manufacturing for August. The data from the last of the reports from the Dallas and Richmond Fed’s actually turned around from the prior month. The Richmond Fed’s Composite Manufacturing Index rose 13 points, but only to a meager 1 after -12 in the prior month. The Dallas Fed’s general activity index climbed 9 points to a narrowly expansionary 2.7 after two months of negatives. This does not presage a particularly robust number for the ISM Manufacturing Index in August, especially with most of the other surveys pointing lower.
Activity in the service sector also looked less healthy in August. The revenues index in the Richmond Fed Survey of the Service Sector fell 5 point to 6, signally only middling activity. The Dallas Fed’s Texas Service Sector Outlook’s general business activity index was only nominally positive at 0.2, a 4.5 point decline from the prior month. Combined with earlier survey reports, the non-manufacturing sector – which has been a mainstay of growth – is starting to lose ground more consistently. Expansion isn’t absent, but it isn’t as strong or reliable.
In spite of recent lows in mortgage interest rates, the data on the housing market has not been as robust as might be expected. The FHFA House Price Index for June pointed to continued deceleration in prices for homes. This may be good news for potential buyers as it means more negotiating power and better affordability. However, it may cause some potential sellers to wait to put units on the market. The NAR’s Pending Home Sales Index for July surprised to the downside with a 2.5% decline to 105.6. However, the 108.3 reading of June was an outlier and the July data is much more in line with the recent trend. Still, it means that there is less upward momentum for existing home sales in August.
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