A repertoire of mixed economic news seemed to be the main theme of July. On the bearish front, employment growth decelerated and construction spending fell. Adding to this sentiment were disappointing pending home sales and weekly shopping growth slowing down to below 2.5%. On the other hand, GDP came out better than expected, and the U.S. manufacturing reports showed stunning improvements.
GDP: The U.S. economy grew 1.7% in the second quarter, a pace that exceeded most expectations. The growth was driven mostly by the consumer, which remains the main engine of the recovery. The biggest surprise, however, was much smaller-than-expected defense-spending cuts that mysteriously stopped in the middle of the sequestration. As a result, government subtracted just 0.1% from the GDP in the second quarter. It is worth noting that the 2012 fourth-quarter GDP was reduced to 0.1% (from 0.4%), and the first-quarter 2013 figure was reduced to 1.1% (from 1.8%).
Employment: The month-to-month numbers for July showed a modest slowing from June. Private-sector employment was slower, hours worked were down, and hourly wages were off. Total job growth for July was 162,000 versus a 12-month average of 188,000 jobs and 189,000 jobs added in June. The culprit in the monthly numbers was slow health-care growth and diminished construction employment. Health-care hiring, a staple of employment growth since the recovery began, has slowed dramatically over the past few months as the Affordable Care Act, and all of its uncertainties, have caused health-care executives to exercise restraint in hiring. The year-over-year trends in employment, however, are virtually unchanged from a month ago. Private-sector employment and hourly wages continue to grow about 2.0%, while hours worked remain virtually unchanged. The unemployment rate in August fell to 7.4% from 7.6% a month before.
Housing: Pending home sales slowed slightly in June, both on a single month-over-month and year-over-year basis. On the home-prices front, an FHFA survey showed year-over-year growth of 7.3% on a single-month basis for the period ended in May—not much different from the April’s results. This is in contrast to CoreLogic and S&P/Case-Shiller data that are continuing to accelerate at a pace greater than 12%. While year-over-year price data looks promising, the month-over-month pace looks much worse. It’s not at all clear if continued tight lending conditions, a lack of inventory/vacant lots, or higher interest rates are behind the lackluster housing results. Despite those headwinds, however, economists predict home-price appreciation between 8%-10% for the full year.
Manufacturing: Manufacturing has been on a plateau for a good part of 2013 as weakening exports weighed on the sector. U.S. demand was no great shakes, either. However, stronger auto and airliner markets have kept the U.S. in positive territory, unlike Europe and China. Economists surmised that in some month this year, accelerating auto production and faster ramp-up at Boeing would begin to make the manufacturing sector look a little stronger. That month appears to have been July. Both Markit Manufacturing PMI and ISM data showed a marked change for the better with this month’s U.S. readings. Markit PMI increased to 53.2 from 51.9 in June, and ISM jumped to 55.4 from 50.9 a month earlier.
Auto: According to Automotive News, auto sales were 15.7 million (which equates to about 15.6 million using the BEA, GDP methodology) for July, off ever so slightly from June’s recovery high of close to 16 million units. While the “what have you done for me lately?” crowd wasn’t thrilled about the decrease, it is important to note that the pop in June was unusually large. Also, the relatively strong start in July (compared with a not-so-good April) means that the auto industry might be a bigger contributor to GDP growth in the third quarter after showing no gains in the second quarter.