The third quarter is closing with more of a fizzle than a bang. Economic data look solid in some areas and soft in others.
Income and spending data for July and August imply downside risk for our forecast of 2.1 percent real GDP growth for the soon-to-be completed third quarter. Total personal income increased by 0.4 percent in August, the strongest gain since February. Real disposable income was up 0.3 percent. Real consumer spending increased by 0.2 percent. Real consumer spending growth for Q3 looks to be weak-to-moderate, in the vicinity of 1.5 percent on an annualized basis. Despite strong car sales, real consumer spending for Q3 will be held down by weak growth in spending on services, some of which was weather-related in July.
The third estimate of real GDP growth for the second quarter was unchanged at a 2.5 percent annualized rate. The U.S. economy had more momentum in Q2 than originally expected, helping to buffer the drag from fiscal tightening and weak global demand.
New orders for durable goods increased slightly, by 0.1 percent in August. This followed a big 8.1 percent decline in July. July orders were soured by weakness in computers and communications equipment, and by a downdraft in commercial aircraft orders. The stability visible in August is welcomed news, but it is less than a “normal” bounce-back from a weak July. On a year-ago basis, new orders for August were up 9.9 percent, so that is looking reasonably strong. However, just looking at the raw data we do see some flattening out of new orders in 2012 and 2013. Sometimes that flattening out is a precursor to a pullback. Other times it can give way to a re-acceleration. Improving prospects for rest-of-world demand next year, less drag from fiscal tightening, and a more solid household sector all augurs for a reacceleration of capital spending. However, a dysfunctional federal budget process may keep consumer and business confidence in check.
New home sales rebounded by 7.9 percent in August, after falling by 14.1 percent in July. The July dip may turn out to be an outlier but it also serves as a warning that new home sales are more vulnerable to the headwinds from rising mortgage rates than existing home sales. The months’ supply of new homes tightened up in August to 5.0 months’ worth at the current sales pace.
Initial claims for unemployment insurance decreased by 5,000 to hit 305,000 for the week ending September 21. Technical issues in processing claims in California, which have contributed to lower claims in recent weeks, have been resolved according to the Department of Labor. Claims in the neighborhood of 300,000 are consistent with steadily improving labor market conditions.
For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly092713.