Small Q2 GDP Upgrade, Slower Growth in August: What We Learned During the Week of September 21-25

Yes, GDP growth was revised slightly upward but most of the other data released last week was not nearly as strong. Nevertheless, Fed Chair Janet Yellen said in a speech on Thursday that she anticipates it being “appropriate” to raise the fed funds target rate before the year is out. Here are the 5 things we learned from U.S. economic data released during the week ending September 25.

#12nd Quarter GDP was stronger than previously thought thanks to higher levels of consumer spending and business investment. The Bureau of Economic Analysis’ 3rd estimate of Q2 GDP raised its seasonally adjusted annualized rate of economic expansion to +3.9%, versus the +3.7% estimate released a month earlier and the initial +2.3% gain reported in late July. All of the major components of GDP made positive contributions to the measure of economic activity. The biggest contributors to Q2 GDP growth were consumption (adding 242-basis points to GDP growth, with nearly equal contributions coming from spending on goods and services), fixed nonresidential investment (adding 53-basis points), government expenditures (+46-basis points) and fixed residential investment (+30-basis points). Current consensus has the economic expansion being slower during the current quarter, with growth forecasts ranging from the mid-to-upper 1% range to lower 2%. The personal consumption expenditure (PCE) deflator, a measure of inflation, jumped 2.2% during the quarter, its fastest pace of growth since the final months of 2012. Blame the rebound in energy prices for some of the inflation. Net of energy and food, the core PCE deflator grew 1.9%.

#2Economic growth appears to have slowed during August because of soft manufacturing activity. The Chicago Fed National Activity Index (CFNAI), a weighted metric of business activity based on 85 economic indicators, plummeted by 92-basis points to a reading of -0.41. Much of the drop can be tied to the 66-basis drop in index components related to production/income, although the other 3 major categories of indicators also lost a step during the month: employment (down 19-basis points), sales/orders/inventories (down 6-basis points) and consumption/housing (down 2-basis points). The 3-month moving average for the CFNAI only lost a single basis point to +0.01. This reading is consistent with an economy that is growing near its historic growth rate.

#3Mixed housing news for August: slower existing home sales and higher new home sales. The National Association of Realtors’ seasonally adjusted annualized measure of previously owned homes slumped 4.8% during the month to 5.31 million units. Sales slowed in 3 of 4 Census regions but were unchanged in the Northeast. Even with the decline, existing home sales were 6.2% above year ago levels and still close to its post-recession high. The 2.29 million homes on the market at the end of August (+1.3% vs. July 2015, -1.7% vs. August 2014) represented a tight 5.2 month supply. The median sales price of $228,700 was up 4.7% from a year earlier. The press release suggested the decline in home sales was because “the persistent summer theme of tight inventory levels likely deterred some buyers.”

Meanwhile, new home sales grew 5.7% during the same month to 552,000 units (SAAR). The Census Bureau estimates new home sales grew in 3 of 4 Census regions—Northeast (+24.1%), South (+7.4%) and West (+5.4%)—but declined 9.1% in the Midwest. New home sales have grown 21.6% over the past year, with double digit percentage gains in all 4 Census regions. Inventories of unsold new homes remained tight—the 216,000 new homes available for sale at the end of August (+0.5% vs. July 2015, +5.4% vs. August 2014) represented a 4.7 month supply.

#4Durable goods orders fell in August, hurt by fewer orders for aircraft and slowing business investment. The Census Bureau estimates durable goods orders were at a seasonally adjusted $236.3 billion, down 2.0% for the month and 2.3% from a year earlier. Transportation goods orders were their typical volatile self, having fallen 5.8% for the month due to a 5.9% drop in civilian aircraft orders and a 1.6% decline in automobile orders. Net of transportation goods, durable goods orders were unchanged during August at $157.6 billion. The closely watched proxy for business investment—nondefense capital goods orders net of aircraft—slipped 0.2% for the month. Shipments were virtually unchanged for the month at $243.2 billion, unfilled orders declined 0.2% to $1.195 trillion and inventories was essentially unchanged at $401.4 billion.

#5Consumer confidence softened during September, likely due to recent stock market volatility. The Index of Consumer Sentiment from the University of Michigan lost 4.7 points during the month to a seasonally adjusted 87.2 (1966 Q1 = 100). This actually was a 1.5 point improvement from the preliminary September reading released earlier in the month. The current conditions index lost 3.9 points to 101.2 while the expectations index shed 5.2 points to 78.2. Regardless of whether September’s step back was fleeting or a trend, it is noteworthy that all three measures were still sitting above their year ago readings. The press release links the rebound in sentiment during the latter half of the month to consumers increasingly [concluding] that the stock market declines had more to do with international conditions than the domestic economy.” The group expects consumer spending will grow at an annualized rate of 2.9% during the final months of 2015 and through 2016.

Other data released over the past week that you might find of interest:
Jobless Claims (week ending September 19, 2015): 267,000 (+3,000 vs. week earlier); 4-week moving average: 271,750 (-750 vs. week earlier).
FHFA House Price Index (July 2015): +0.6% vs. June 2015, +5.8% vs. July 2014.

The opinions expressed here are not necessarily those of Kevin’s current and previous employers. No endorsements are implied.

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