Economic data from the last week of the second quarter show a U.S. economy limping into the summer with little prospect of a sudden reacceleration. Monthly job gains have averaged only 96,000 for March through May, keeping wage and salary income and, most importantly, consumer spending in check. For the nearly complete second quarter consumer spending will remain subdued, expanding at about 1.5 percent annualized, consistent with below 2 percent real GDP growth for the second quarter. Inflation readings went backwards in May as gasoline prices fell. The personal consumption expenditure price index dropped by 0.2 percent as the energy sub-index fell by 4.6 percent. The core PCE price index (all items less food and energy) gained a sedate 0.1 percent in May. New orders for durable goods increased by 1.1 percent in May after falling in March and April. This is a somewhat volatile series so two consecutive monthly declines is not necessarily a red flag, but three would have been. The manufacturing sector dodged a bullet in May, but there are more bullets on the way. Deepening recession in Europe and slower growth in Asia are taking a toll on demand for manufactured goods worldwide. Also, weaker energy prices in the U.S. are a growing headwind for the oil patch. If the count of active drilling rigs eases, that will also take a bite out of demand for the manufacturing sector. Fortunately auto demand looks reasonably solid, as long as job creation holds up. Also, nascent growth in residential construction is a positive for manufacturing. We are not getting a lot of good news from labor market indicators lately. On the one hand, initial claims for unemployment insurance decreased by 6,000 for the week ending June 23. On the other hand, a series of upward revisions to historical data keeps elevating the level of UI claims, now up to 386,000. Claims are expected to drop again through the summer as automakers take shorter than normal breaks for summertime retooling. Fortunately, U.S. housing markets continue to show signs of improvement. New home sales for May increased by 7.6 percent to hit an annual rate of 369,000 units. Prices are firming up, too, and that will lead to more sales as buyers lose their fear of ongoing depreciation. The Case-Shiller 20-City composite house price index for April was up 0.7 percent for the month with 17 out of 20 cities showing gains. Housing doesn’t improve on air; it needs gains in household wealth to drive it forward. It all comes back to job growth.
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