Comerica Economic Weekly

Data releases were relatively sparse for the last week of July after a busy schedule for the previous week. The data that did come out did nothing to dispel the gathering gloom about cooler economic conditions both here and abroad. Real gross domestic product for the U.S. increased at a lackluster 1.5 percent annual rate in the second quarter, following a now-revised 2.0 percent growth rate for the first quarter. So far, there is no evidence to suggest that the current third quarter will look significantly different from the second quarter. The United Kingdom reported their third consecutive quarterly decline in real GDP for Q2. New home sales fell by 8.4 percent in June,  and existing home sales fell by 5.4 percent as previously reported. Both new and existing home series have been on an upward trend, and are somewhat volatile, so a one-month decline in either series should not be viewed as a trend breaker. But a coincident decline in both new and existing home sales, in the presence of other weakening economic data, does focus the attention and suggests that home buyer confidence is vulnerable to a cooler U.S. economy. If the U.S. economy cools further in 2012H2, or more likely, in 2013H1, discretionary purchases for items including houses and cars will feel the drag from weaker job growth and reduced buyer confidence. Even with increasing economic headwinds, home sales will likely not relapse to their 2010-early 2011 lows. Firming prices and improved credit availability will keep the floor for new and existing home sales higher in the absence of another hard recession. Mortgage applications for the week ending July 20 are not encouraging for July home sales. Total applications increased by 0.9 percent, but purchase applications declined by 3.2 percent as refi apps increased by 1.8 percent. Purchase apps have been much flatter than refi apps since May. Correspondingly, the Pending Home Sales Index for June showed a 1.4 percent decline, indicating  still-softer home sales for July. The Federal Reserve Bank of Richmond’s Manufacturing Activity Survey for July showed deteriorating manufacturing conditions in the region from Maryland through South Carolina. New orders for durable goods increased by 1.6 percent in June, good at face value, but a deeper dive is less sanguine. New orders in June were supported by bounces in both commercial and defense aircraft orders. Core orders, nondefense capital goods excluding aircraft, fell by 1.4 percent.  The most positive statistic for the week is also the most inscrutable.  Initial claims for unemployment insurance fell by a sizeable 35,000 to hit 353,000 for the week ending July 21.  Volatility for that series has increased in recent weeks, so more data is needed to confirm an improving trend.

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