Expanding Further: July 26 – 30

Economic activity and prices keep growing. Here are the five things we learned from U.S. economic data released during the week ending July 30.

Consumer spending and business investment drove Q2’s economic expansion. The Bureau of Economic Analysis reports that Gross Domestic Product (GDP) swelled 6.5 percent on a seasonally adjusted annualized basis during the second quarter. While below some forecasts, Q2 GDP grew slightly faster than Q1’s 6.3 percent gain and was the fourth straight quarter of expansion following the massive contraction at the start of the pandemic. Q2 was also the first quarter in which real (inflation-adjusted) GDP was larger than before the pandemic. During the quarter, the most significant contributions to economic growth were personal spending, exports, and fixed nonresidential (business) investment. At the same time, supply shortages weighed on fixed residential investment and inventory accumulation. The BEA will update its Q2 GDP estimates twice over the next two months.

Consumer spending rebounded while inflation remained an issue in June. The Bureau of Economic Analysis tells us that real Personal Consumption Expenditures (PCE) grew a seasonally adjusted 0.5 percent during the month after having contracted 0.6 percent in June. Spending on goods fell 0.2 percent, hurt by a 2.5 drop in durable goods spending (nondurables: +1.2 percent), while services expenditures gained 0.8 percent. Without inflation adjustments, nominal PCE surged 1.0 percent even as nominal personal (+0.1 percent) and disposable (unchanged) income essentially held steady. Real disposable income fell 0.5 percent. As a result, the savings rate fell by 9/10^ths of a point to a still healthy +9.4 percent. Relative to a year ago, real PCE was up 9.2 percent even as real disposable income was off 3.0 percent. The PCE price index, a closely watched inflation measure, grew 0.5 percent for the month and was up 4.0 percent from a year earlier. The core PCE price index, which removes both food and energy, increased 0.4 percent from May and 3.5 percent from June 2020. Both the headline and core price indices were well above the Federal Reserve’s two-percent target rate.

The Fed does not change its course. The policy statement released following this past week’s Federal Open Market Committee (FOMC) meeting largely resembled other recent policy statements, with only some relatively minor word changes. It noted that “indicators of economic activity and employment continued to strengthen” and that some sectors of the economy had “not fully recovered.” Further, the statement noted that even with “progress on vaccinations…risk to the economic outlook remained.” Hence, the FOMC voted unanimously to keep the fed funds target rate near zero percent and to continue purchasing Treasury securities and agency mortgage-backed securities. In the case of when to roll back the latter, the statement said, “the Committee will continue to assess progress in coming meetings.”

Inflation had differing effects on two consumer sentiment surveys. The Conference Board’s Consumer Confidence Index inched up by 2/10^ths of a point to a pandemic-high of 129.1 (1985=100). The index was up from last July’s 91.7 mark. The current conditions index added 7/10^ths of a point to 160.3, while the expectations index slipped by 1/10^th of a point to 108.5. 26.4 percent of survey respondents reported that business conditions were “good,” compared to 19.3 percent, saying they were “bad.” A massive 54.9 percent of consumers felt that jobs were “plentiful” versus only 10.5 percent feeling that they were “hard to get.” The press release noted that consumers’ inflationary expectations “remained elevated” but had eased a bit from recent months.

Meanwhile, the Index of Consumer Sentiment from the University of Michigan shed 4.3 points in July to a seasonally adjusted 81.2 (1966Q1=100). While up 4/10^ths of a point from the preliminary July reading, the measure has slumped nearly 20 points since February. The current conditions index lost 4.1 points (to 84.5) during the month the expectations index dropped by 4.5 points (to 79.0). The press release noted “complaints about high prices for homes, vehicles, and household durables.”

New home sales dropped again in June amid supply shortages. The Census Bureau reports new home sales declined 6.6 percent during the month to a seasonally adjusted annualized rate of 676,000 units. Sales were 19.4 percent below their year-ago pace. Of the four Census regions, sales managed to increase (both month-to-month and year-to-year) only in the Midwest. There were 353,000 homes available for sale at the end of June, up 14.5 percent from the prior month and translating into a 6.3 month supply. The median sales price of $361,800 was up 6.1 percent from a year earlier.

Other U.S. economic data released over the past week:

• Jobless Claims (Week ending July 24, 2021, First-Time Claims, seasonally adjusted): 400,000, -24,000 vs. the previous week, -862,000 vs. the same week a year earlier). 4-week moving average: 394,500 (-71.5% vs. the same week a year earlier).

• Pending Home Sales (June 2021, Index (2001=100), seasonally adjusted): 112.8 (-1.9% vs. May 2021; -1.9% vs. June 2020).

• Case Shiller Home Price Index (May 2021, 20-City Index, seasonally adjusted):  +1.8% vs. April 2021; +17.0% vs. May 2020.

• FHFA House Price Index (May 2021, Purchase-Only, seasonally adjusted): +1.7% vs. April 2021, +18.0% vs. May 2020.

• Agricultural Prices (June 2021, Prices Received by Farmers, not seasonally adjusted): +0.9% vs. May 2021, +21.8% vs. June 2020.

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