GDP Is Up; Consumer Spending and Personal Income Is Down
A series of second quarter economic reports indicates that economic optimism is still warranted, but the messages remain mixed.
On the positive side, the second quarter GDP was revised upward from 4% to 4.2%. The slight increase was attributed mostly to an increase in nonresidential fixed investment. Personal consumption expenditures were up by 2.5%, an improvement over the 1.2% first quarter increase.
These numbers represent growth – albeit slow growth. For perspective, recall that the first quarter GDP contracted 2.1%; the overall growth for the first half of 2014 is approximately 1%. Also, while 2.5% growth is improvement, it represents a below-average figure (the post-Depression average is approximately 3.3%).
On the negative side, the Personal Income and Outlays report released on Friday shows a disappointing drop in monthly consumer spending in July. While the reduction was only 0.1%, it follows 0.4% growth in June – surprising analysts and breaking positive momentum. Durable goods led the drop with a 0.7% contraction, while nondurable goods dropped 0.1% and services were unchanged.
Personal income is still growing, but this growth slowed in July. The growth rate was just 0.2%, representing a seven-month low and blunting the momentum of two consecutive months of 0.5% growth. The wages and salaries portion followed a similar track.
Economists are not too concerned about this yet, presuming that with continuing job growth, consumer spending is likely to rise, and that July is an aberration. It will, however, draw the third quarter GDP numbers down and make 3% GDP growth for the year a difficult target to hit.
Housing Is Still Recovering, But Slowly
Multiple housing reports came out in the past week, reinforcing the message of a housing market —and broader economy — that is not quite stuck in neutral, but is also nowhere near the higher gears.
New home sales came in below expectations in July, but the effects were blunted slightly by upward revisions to the previous two months. The market supply of homes increased to a six-month supply and the median price fell to $269,800. Meanwhile, the S&P Case-Schiller Home Price Index showed a continuing decline in the 20 major cities it covers, with a 0.2% decline in June following a 0.3% decline in May.
These two reports, combined with data from the FHFA House Price Index, add up to weakening home prices and lackluster sales. However, at least one of the leading housing indicators is positive. The Pending Home Sales Index, which focuses on the sale of existing homes, beat expectations and rose significantly.
The mixed set of messages could be interpreted as one consistent message: the economy is continuing to grow at a steady but unspectacular rate. Economists continue to be optimistic about housing, but so far, that optimism has not been sufficiently fulfilled. Credit is still somewhat tight but slow growth in the housing market cannot be blamed entirely on banks – or regulators, if you prefer.
Similarly, many economists are forecasting continued earnings growth and subsequent GDP growth in the 2-3% range. This would be considered a decent growth number by historical standards, but it is not enough to soak up the job slack that has persisted since the Great Recession, and kick the economy into a significantly higher gear.
Unless there are some staggeringly positive job reports in the coming week, it is likely that conditions will continue as they have for months – the Fed will not raise interest rates, and stocks will continue to be the best bet in the short-term, even if the growth begins to slow or flatten out.
As a final thought, keep in mind that September is generally the poorest performing month of the year for stocks, so do not necessarily interpret slowing September results as the beginning of a correction, or even a bear market.