U.S. economic data released in the middle of August are consistent with an economy that has moderate, but not robust, momentum halfway through the third quarter. On the upside of the story, house prices have increased significantly over the last year and that is a positive for consumers. On the down side of the story, business investment remains weak. The disconnect between those two aspects of the U.S. economy is troublesome. Our expectation for the remainder of the year is that increasing consumer confidence will bolster consumer spending, and that increased consumer spending will lead to stronger business investment. This mechanism will support moderate job growth in a virtuous economic cycle.
However, business confidence is still weak by historical standards. The National Federation of Independent Businesses’ Small Business Optimism Index ticked up only slightly to a still-low 94.1 in July. Significantly, the capital spending portion of the survey paints a weak spending picture for the remainder of the year. This represents a downside risk to our expectation for improving conditions through the second half of this year.
Retail sales for July increased by 0.2 percent, matching overall consumer price inflation. Despite the soft headline number, the components of retail sales still make a case for consumer resilience. Auto sales for July dipped slightly to a 15.8 million unit rate after posting a breakout 15.9 in June. Retail sales of autos (in dollar terms) dipped by 1.0 percent in July. The University of Michigan’s Consumer Sentiment Survey unexpectedly dipped in August from 85.1 to 80.0, the biggest one-month fall this year.
Support for Q3 GDP growth comes, counter-intuitively, from weak June inventory accumulation. Business inventories were unchanged in June. This number is significant in two ways. First, it implies some negative offset to the expected upward revision to Q2 GDP due to the better-than-expected international trade data for June. Q2 real GDP growth in the vicinity of 2.2 percent, revised up from the advance estimate of 1.7 percent, is still a good guess. Second, weak inventory accumulation through Q2 implies that there will be some catch up in Q3 and/or Q4. Gains in business inventory accumulation should be a positive for real GDP growth in the second half of the year. Also, farm inventories will look better in the fall after last year’s drought.
Prices remain contained. The producer price index for finished goods was unchanged in July. The consumer price index was up 0.2 percent for the month.
Housing starts were up 5.9 percent in July to an 896,000 unit annual rate. It is good news to see the monthly gain, but starts remain range-bound since last December. Same story for permits.
The best news of the week came from initial claims for unemployment insurance which dropped by 15,000 to hit 320,000 for the week ending August 10. This is the best weekly claims number since October 2007. Labor productivity remains weak, growing at a 0.9 percent annual rate in the second quarter. Expected upward revisions to Q2 GDP could lead to a downward revision to Q2 productivity growth.
For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly081613.