Indicators Show Moderate Growth in Just-Completed Second Quarter
- The ISM Manufacturing Index for June increased to 50.9 percent, indicating slight improvement.
- Construction Spending for May gained 0.5 percent, held down by weak private non-residential activity.
We cross the mid-year 2013 mark with a U.S. economy that is seeing some lift from a virtuous economic cycle with its origins in steadily improving residential real estate markets through 2012. Homeowners are seeing house prices increase at a double-digit clip in many large markets. Homeowners’ equity is accumulating at a rapid rate. Auto sales look firm above a 15 million unit rate. Consumer confidence is trending up. Manufacturing conditions remain mildly positive. The unemployment rate has been trending down slowly. Frustratingly, not all parts of the economy have felt the lift. Nonresidential construction is still lagging. Business fixed investment was uninspired in the first quarter of this year, barely growing at a 0.42 percent annual rate. Global demand is still soft. Europe may be showing some signs of stability at the core, but many peripheral economies are still highly dysfunctional. Asia is a concern. Recent actions by the Bank of China have resulted in tighter credit conditions there at a time when manufacturing and export activity looks relatively weak. Manufacturing indexes for China have fallen into slight contraction. Japan is showing a positive response to aggressive fiscal and monetary policy known as “Abenomics”.
The third quarter is shaping up to be an interesting one for the U.S. economy. The virtuous economic cycle outlined above will continue to drive overall growth. Federal Reserve monetary policy remains highly accommodative. Financial markets expect to see the beginnings of a policy wind-down before the end of the year. Expectations are coalescing around the September 17-18 FOMC meeting as the start of the “calibration” of QE3. This is by no means certain, especially if economic data softens through Q3. Fiscal tightening will continue to weigh on GDP growth through the second half of 2013. Easing inventory accumulation in the second half of 2013 could result in cooler production. This confluence of opposing forces will keep financial markets choppy through the end of the summer.
Looking ahead to the fourth quarter and beyond, it is possible to see a faint rainbow as some of the dark and dismal clouds begin to dissipate. By then we may have crossed into the land of monetary policy “calibration” without a significant correction in financial markets. European economic recovery may be more visible. Fiscal tightening in the U.S. will still be a negative force, but the cumulative drag will start to ease in 2014. Job creation may step up as businesses feel more confident in the economic recovery and as policy uncertainty diminishes.
Market Reaction: U.S. equity prices opened higher. Treasury rates are down at the long end of the yield curve. Oil is up to $98.17/barrel. The dollar is up against the yen and the euro.