Popular Economics Weekly
In spite of all those predictions that GDP growth would exceed 3 percent for the rest of the year and into 2016, the latest factory orders and inflation indicators show a slowdown in Q3 from Q2’s gangbusters growth, probably thanks to China’s abrupt downturn in manufacturing.
Q2 GDP was revised higher from its earlier 3.7 percent estimate. Personal spending was stronger than thought in the second quarter, helping to drive real GDP to a very solid 3.9 percent annualized rate. Boosted by the consumer, final sales also rose 3.9 percent for a 4 tenths upward revision.
Personal consumption expenditures were the main reason, revised 5 tenths higher to 3.6 percent as the service spending component, reflecting strength in travel, was revised 7 tenths higher to 2.7 percent. So consumers are spending more, thanks to the good jobs numbers.
Revisions to goods spending were mixed with durable goods that last more than 3 years down 2 tenths to a vehicle-led surge of 8.0 percent with nondurables up 2 tenths to 4.3 percent. Consumer strength is also evident in a 1.5 percentage point upward revision to residential fixed investment, now at 9.3 percent.
But what else is driving growth, finally? Nonresidential fixed investment, driven by structures, is revised 9 tenths higher to 4.1 percent. But new-home sales are also surging, as builders try to catch up with the now severe shortage in new housing due to the housing bust. Another plus in the report is a downward revision to inventory growth.
New home sales can be very volatile month-to-month as they are in the August report where, at 552,000, the annual rate came in far above the high-end estimate. This is the highest rate since February 2008. Adding to the momentum is a 15,000 upward revision to July.
In especially welcome news for builders, the sales strength pulled supply relative to sales even lower, to 4.7 months from 4.9 months. Still, low supply is a constraint on sales in contrast to pricing which remains favorable, at a median $292,700 for a 0.5 percent gain on the month but at a paltry year-on-year gain of only 0.3 percent. By comparison, the year-on-year sales gain is 22 percent.
Existing home sales came in at a lower-than-expected 5.31 million annual rate in August which is the lowest since April. Though July was revised down just slightly but is still an 8-year high at 5.58 million. With the in dip sales, supply relative to sales is less tight, at 5.2 months from 4.9 months in the prior two months. But there's still a lack of homes on the market, evidenced by a comparison with the year-ago supply at 5.6 months.
Now we have to begin to guess at Q3 growth. China’s slowdown and the strong Dollar (U.S. now the fastest growing western economy, by the way) have hurt exports. That and the current oil oversupply have brought down inflation, which might keep Yellen’s Fed from raising interest rates this year at all, as we have been saying. But it also means lower growth in the factory sector, and manufacturing over all.
So it will be up to consumers and the service sector of domestic consumption to keep us above 3 percent growth in Q3. Consumer sentiment is one indicator of how consumers feel, and they are remaining optimistic, in spite of the plunge in stock prices, of late.
Consumer sentiment popped up as expected from stock-market depression at mid-month, to 87.2 for final September from 85.7 for the flash. Still, September's final reading is the weakest since October last year. The expectations component, which tracks the jobs outlook, improved 1.2 points from mid-month to end September at 78.2 which is the lowest reading since September last year, says Econoday. The current conditions component, which tracks ongoing strength in the jobs market, rose 9 tenths to 101.2 for the lowest reading since October.
So stay tuned to the Fed’s next 2 FOMC meetings this year, and we will know if Yellen and Company dare to raise interest rates at all.
Harlan Green © 2015
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