The U.S. market declined in July after accumulating some very healthy gains over the past 18 months. A lot of earnings reports from around the world (and especially from Europe) were soft, which didn’t help matters. Other worrying news included the Argentinean bond default, new Russian sanctions, and an escalating situation in the Middle East.
GDP: The first-quarter contraction was revised to a considerably smaller 2.1% from 2.9%. Headline GDP grew 4% (annualized) in the second quarter, in contrast to a decline of 2.1% in the first quarter. To understand the true state of the economy, it is necessary to look at those two numbers in aggregate, with the first quarter probably not as bad as the numbers suggest, and the second quarter not as good. The annualized first-half results show growth of just under 1%, slightly less than the 2% long-term trend. However, using the more accurate year-over-year methodology, growth in the first half compared with a year ago remained on its long-term trend of 2.2%.
Employment: Headline employment grew by 209,000 jobs in July, which is exactly equal to the average of the past 12 months. The year-over-year percentage change, averaged over three months for both private sector and nonfarm payrolls, remains stuck very near these sectors’ 12-month averages of 2.1% and 1.7%. This stability is in direct contrast to GDP growth, which has been all over the map and is quickly losing economic relevance, at least in the short run.
The construction sector and durable goods manufacturing, as well as mining and extraction, all produced job growth substantially above their 12-month averages. Government jobs also showed some growth after years of losses. On the other hand, retail, education, health, and leisure all produced job growth well below their 12-month averages.
Wages: Monthly wages increased by 0.04%, which makes the headline number rounded to one decimal point (0.0%) somewhat misleading. Nonetheless, this equals to a monthly increase in hourly wages by just a penny to $24.45. On a year-over-year, three-month average basis, wages are still growing at about 2%, which equates to about half a dollar more an hour compared with a year ago. While this paints a slightly better picture than the monthly 0.04% growth, it is still way below the pace that we were experiencing prior to the recession. What is even more alarming is that on an inflation-adjusted basis, workers are earning basically the same wages as they were a year ago.
Housing: The last pending home sales report (June) wasn’t terribly helpful, as the index barely budged, decreasing 1.1% between May and June after four consecutive months of improvement. Two of the four regions showed improvement, the West and the Midwest, while two saw declines, the Northeast and the South. The little-changed pending home sales index most likely means that existing-home sales for July will be little changed from June levels. For the record, existing-home sales in June were 5.04 million units. That existing-home sales reading for June was on par with existing homes in April 2013, which is just before existing-home sales data soared as buyers rushed to close mortgages before rates increased.
Consumption and Personal Income: Year to date, income growth has far exceeded consumption growth. Consumption is up its typical 0.94% (1.9% annualized), while income (as measured by inflation-adjusted total income, less taxes) is up a stunning 2.1% (4.2% annualized). This means that consumers, for one reason or another, have spent less than half of the income they have gained so far in 2014, which may explain why consumer confidence is at a recovery high. That gives consumers a lot of firepower to spend more in the second half of the year to make up for the lackluster first half.