U.S. economic data released this week are consistent with a modest increase in economic activity through the third quarter. “Modest” is as important of a descriptor as “increase,” as this is still a U.S. economy that is fundamentally challenged in its ability to sustain real GDP growth above about 2.5 percent.
Second quarter real GDP growth was revised up to a 1.4 percent annualized rate with revisions to net exports and non-residential investment adding slightly to the headline number. Consumer spending is still the key to Q2 growth, adding 2.9 percent to the headline growth rate. Inventories are still the major drag for the quarter, subtracting 1.2 percent from headline growth. We expect real GDP growth from the now-complete third quarter to register around 2.5 percent.
Nominal personal income increased in August by 0.2 percent. Wages and salaries, which account for about half of total income, were flattish, gaining only 0.1 percent for the month, after four consecutive strong monthly increases. Rental income increased by a strong 0.7 percent in August, consistent with higher rents across both residential and non-residential real estate markets.
Nominal personal consumption was unchanged in August, reflecting a drop in durable goods purchases, including cars. Inflation, as measured by the PCE price index, was weak for the third consecutive month, up in August by just 0.1 percent. Over the previous 12 months, the PCE price index was up by 1.0 percent. The core PCE price index (ex-food and energy) was up by 1.7 percent.
Initial claims for unemployment insurance ticked up by 3,000 for the week ending September 24, to hit 259,000. Continuing claims fell by 46,000, to hit a very low 2,062,000. Favorable September UI claims data suggests that hiring continued at a good pace. We expect to see about 180,000 payroll jobs added to the U.S. economy, on net, in September. This will keep labor market conditions tight and put upward pressure on wages.
New orders for durable goods were unchanged in August, reinforcing our view that the U.S. manufacturing sector is feeling little momentum. Core orders (nondefense capital goods excluding aircraft) gained 0.6 percent for the month.
However, U.S. consumer confidence is showing momentum, despite the flat consumer spending numbers reported for August. The Conference Board reported that their consumer confidence index increased in September to 104.1, the best number since August 2007.
House prices continue to increase on a year-over-year basis, but the rate of increase is looking a little shaky in some areas on a month-by-month basis. The Case-Shiller U.S. National House Price index for July increased by 0.4 percent and was up by 5.1 percent over the previous 12 months. However, Boston, Chicago, Detroit, Minneapolis, New York, San Francisco and Washington all registered either no gain or losses in July. The Pending Home Sales Index dropped in August by 2.4 percent. New home sales fell by 7.6 percent in August after surging in July. The overall trend for new home sales still looks positive.
We expect the Federal Reserve to remain cautious this fall, waiting until the December 13-14 FOMC meeting to lift the fed funds rate by 25 basis points. On the last day of the third quarter the fed funds futures market showed odds of 57.4 percent for at least one rate hike by December.
For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 09-30-2016.