Economic Notes for the Week of July 30th

Economic news on the U.S. front was mixed this week, although signs of a slowdown continue to persist.

Firstly, the advance estimate of the 2nd Quarter U.S. GDP came out at a +1.5% annualized rate.  Believe it or not, this was largely in line with consensus expectations (lower than some, higher than some others from analysts who have been engaged in a race to lower these estimates as fast as possible).  From a composition standpoint, growth in final domestic sales increased by the same +1.5%, consumer spending increased more than anticipated and investment in equipment/software and housing were up +7% and +10% respectively.  However, government spending was down on both the federal and state/local levels.  The GDP price index and core price indexes grew in the same range (+1.6% and +1.8%).

As officials keep tinkering with the data, 2010 results were revised downward a bit while 2011 numbers were pushed up.  These GDP figures are always a work in progress and never as exact as many would like them to be (they can sometimes be revised up to a year or two later, in fact).  The key question is will this force the Fed’s hand in providing additional stimulus?  The answer is probably a bit inconclusive.  The growth rate is low, but largely as expected, so no negative surprises.  Many estimates call for better growth in the second half of this year and into 2013.  This may not be definite enough or soon enough for many policymakers, who are quite in tuned to not letting the economy continue to stall as it has each summer for the past several years. 

The durable goods orders report was mixed.  While orders were up +1.6% versus a flat forecast, most of the increase was due to a +62% gain in defense industry orders.  Other than that anomaly, non-defense orders were down -0.7% and core capital goods (nondefense ex-aircraft) were off by -1.4%.  There were some upward revisions to prior data, though, which was a positive.

The Richmond Fed Survey, another regional manufacturing index tracked by folks lately in an attempt to get a glance at the ‘margin’ of what looks to be an inflection point between growth and stagnation, dropped in July to its lowest showing since April 2009.  While not a great report, these regional releases tend to be a bit noisier than the more mainstream macro data.

Slightly better news on the housing front over the past few weeks has several economists excited (they certainly feel they need something to be excited about), but individual data points continue to be choppy coming in.  The two charts below (esp. housing starts) demonstrate the very slow, yet positive progress happening here.  (We apologize in advance for the small size—when we borrow these types of things from outside sources, adjusting the size larger can either help or hurt.)

New home sales declined sharply in June by -8.4%, which fell short of forecasts calling for a half-percent gain or so.  This offset a few revisions for prior months.  Declines were mainly from the Northeast and South, while sales actually rose in the Midwest and West.

Pending home sales fell -1.4%, which ran counter to an expected gain of +0.3%.  This measure tracks signed but not yet closed sales contracts, so leads the ‘existing’ home sales number by a few months.  The Northeastern U.S. fared the worst (down almost -8%), while the West was up slightly. 

In other housing news, the FHFA house price index (homes using agency-conforming mortgages) rose by +0.8% month-over-month for June, about double what was expected.  This index has risen four months in a row, similar to other home prices indexes.  There appears to be some strengthening here. 

Initial jobless claims for the July 21st week fell to 353k, which markets took as a strong positive relative to the expected 380k figure.  The four-week moving average claims number fell to 367k, largely in line with the trend of the past several months.  Continuing claims came in at a close-to-expected 3,287k for the July 14th week (these don’t tend to vary as much from forecast as initial claims do, anyway). 

Per the chart below, employment has been steadily improving, especially from mid-year last year.  It may feel like a slow-moving job recovery, which it is, but there is positive progress occurring.  Claims data in the summer tends to be a little more sporadic due to factory shutdown activity in the auto industry and other seasonal factors, so these are best taken from a longer-term trend basis.

Next week, the FOMC is meeting again, and be assured the most-watched issues will be whether or not (or how much) additional stimulus will be injected into the U.S. economy.  The debate is ongoing concerning what forms this could take:  additional bond purchases (Treasury or MBS), lowering the discount rate for banks in order to spur them to lend out additional credit to consumers and businesses instead of letting it sit, creating a ‘nominal GDP’ target instead of just an inflation target, or a combination of some tools, as the list goes on and on. 

While economies can be measured through numbers, the study itself is a ‘social science’ and for good reason.  Economics deals with choices, the incentives for making certain choices, as well as disincentives for not making others.  It’s the softer side of the equation that determines hard-to-measure conditions like confidence.  It also explains why, like human nature, confidence can be so fragile and often schizophrenic.  Economists focused on the ‘micro’ might agree that these choices trickle up from individual businesses and consumers making choices based current and perceived conditions—these can be fast-changing and often unpredictable, which explains why surveys can be a little ‘noisy’ month-to-month.  Unknowns like the upcoming ‘fiscal cliff,’ even though many professionals believe the drastic effects of which can and will be avoided, continue to scare the public and business people to some extent.

The news of the week from Europe consisted of ECB president Draghi reinforcing market sentiment by stating the institution will ‘whatever it takes’ to preserve the Euro and those actions ‘will be enough.’  Interesting comments and strong market reaction for those hoping to see a more confident stance (it was enough to boost stock markets worldwide and drop Spanish yields by almost ½ a percent).  The big question, of course, is will it matter and will this be turning point everyone seems to be waiting for?  The stronger language and attitude was certainly welcomed, but there are many politicians involved, as opposed to Draghi alone.  He also emphasized that while the ECB would do everything it could within its mandate (which included acting to ensure bond spreads stay within the range of monetary policy action)—such actions also require the participation of other leaders to ensure success.

Now, ensuring adequate follow-through may be key to sustained market confidence.

Market Notes

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Markets this week were generally higher as stronger sentiment later in the week (see Draghi above) overcame early weakness.  U.S. large-caps outperformed small-caps.  From an industry standpoint, telecom and financials led while materials and technology lagged.


The shining star of the last few years, Apple, missed analyst earnings targets and lowered future expectations—which brought down the entire tech sector due to the large market cap.  The miss appeared to be tied to lower iPhone sales, perhaps as consumers are anticipating a new model out later this year.  As of Friday, just under 60% of S&P companies have reported earnings; of this number, 72% have beaten their earnings estimates, while 40% have surpassed revenue estimates…only a third have beaten on both top- and bottom-lines.  Expectations for forward-looking quarters are also low, and reflect uncertainty on many fronts (although, as we know, estimates can be quickly revised up or down in either direction as conditions change…so worth taking with a grain of salt to some degree).

Despite the Draghi comments, domestic stocks outearned foreign issues, although several key EU nations like Spain, Italy, France and Germany had great weeks.

Government bonds were largely down on the ‘risk-on’ week, while corporate and other spread products were positive.  Foreign bonds were mixed.

Commodities were led by precious metals (presumably on the EU ‘confidence’ vote and implied monetary stimulus to come in Europe and the U.S.), while grain contracts pulled back.

Have a good week.

Karl Schroeder RFC, CSA, AACEP

Investment Advisor Representative

Schroeder Financial Services, Inc.


Sources:  FocusPoint Solutions, Associated Press, Barclays Capital, Bloomberg, Deutsche Bank, Goldman Sachs, JPMorgan Asset Management, Morgan Stanley, MSCI, Morningstar, Northern Trust, Oppenheimer Funds, Payden & Rygel, PIMCO, Thomson Reuters, Schroder’s, Standard & Poor’s, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wells Capital Management, Yahoo!, Zacks Investment Research.  Index performance is shown as total return, which includes dividends, with the exception of MSCI-EM, which is quoted as price return/excluding dividends.  Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar investor terms.

The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness.  All information and opinions expressed are subject to change without notice.  Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product.  Schroeder Financial Services, Inc. is a registered investment advisor.