ECONOMY: AUGUST DATA CONFIRMS STEADY U.S. GROWTH

Economic Data

Economic reports released in August 2017, which mostly reflect economic activity in July, confirmed that the U.S. economy continued to exhibit steady growth at the start of the third quarter after a solid rebound in the second quarter. The primary driver of the expansion was support for business spending which has continued to round out the solid picture of consumer spending. According to Bloomberg-surveyed economists, consensus expectations for real (inflation-adjusted) economic growth in the third and fourth quarter are for 2.5% and 2.4%, respectively.

The second estimate of second quarter gross domestic product (GDP) was released in August, with a meaningful upward revision from the initial estimate of 2.6% to 3.0%, ahead of expectations of 2.7%. The main source of the revision was the underestimated growth of consumer spending, supported by a healthy labor market, although improvement in the initial estimate of business investment was also a positive sign. GDP data is backward looking, but it’s our best overall estimate of economic activity and the positive revision provides added evidence that first quarter weakness was transitory.

On average, data released in August was largely in line with expectations and reflected approximate trend growth in July. Economic weakness was concentrated in inflation data and housing, while economic strength was more broadly based. Consumer spending continues to drive the economy, but business spending is playing an increasing role. A largely healthy labor market has provided important support for consumers, and the July jobs report continued to show strength. The economy added 209,000 jobs in July, according to data available as of August 31, topping expectations of 180,000. Strong jobs data flowed through to spending, retail sales in July rising 0.6%, ahead of expectations, with healthy revision of June data from -0.2% to +0.3%. Consumer strength was also reflected in consumer confidence surveys. The University of Michigan’s Consumer Sentiment reading jumped to 97.6 on a rise in future expectations, although sentiment on current conditions lost a little ground.

Data on July business activity showed largely steady growth. The Institute for Supply Management’s (ISM) Manufacturing Purchasing Managers’ Index (PMI) fell to a still healthy 56.3 in July (above 50 indicates expansion) after surging to 57.8 in June. Markit’s competing Manufacturing PMI rose to 53.3 and continues to paint a less rosy picture, although the spread between the two indexes has narrowed. ISM’s Non-Manufacturing Composite showed unexpected weakness, falling to 53.9, although the Markit Services PMI provided a counterbalance, rising to 56.9. Hard data on business activity showed some upside; shipments of nondefense capital goods ex-aircraft, which flows through to GDP as part of private business investment, jumped 1.0% in July, while orders of durable goods ex transportation (vehicles, aircraft, etc.) climbed a healthy 0.5%. Capital goods shipment data has accelerated sharply year over year off of 2016 lows, and the current value of +7.3% is the strongest since 2012.

Economic data compared to consensus estimates can also provide a helpful real-time gauge of economic activity. The Citi Economic Surprise Index, a rolling average of standardized economic surprises, reversed higher in July and continued to climb in August but remained in negative territory, showing normalization after elevated expectations were not met in the second quarter. Meanwhile, indicators that tend to lead economic activity continue to suggest below-historical odds of recession in the next year. The Conference Board’s Leading Economic Index (LEI), an aggregate of 10 leading indicators, continued to climb in July, rising 3.9% year over year.

Overall, the August data painted a picture of an economy growing a little better than the 2.2% average we’ve seen since the end of the Great Recession—with no apparent threat of a downturn on the immediate horizon.

Central Banks

Major central banks had a quiet August, with no scheduled meetings for the Federal Reserve (Fed), the European Central Bank (ECB), or the Bank of Japan (BOJ). The headline event was the annual Fedsponsored symposium in Jackson Hole, Wyoming from August 24–26. While there have been important market-moving speeches at Jackson Hole in the past, this year’s symposium held no surprises.

Neither Fed Chair Janet Yellen nor ECB President Mario Draghi directly addressed monetary policy. One could interpret their comments as support for the status quo, and in a way, a victory lap for current policies. Fed Chair Yellen’s comments about financial stability could have been interpreted as dovish, but they were also a clear defense of post-crisis regulatory policy. Yellen said reforms since the crisis have boosted the resilience of the system, and she downplayed concerns about the effects of regulation on bank lending and liquidity. ECB President Draghi delivered nothing new in terms of policy expectations, but he did say that substantial accommodation is still warranted considering still low inflation, giving his speech a dovish tilt. He spent the majority of the time defending international trade and provided a warning against the increasing rise of protectionism. However, he did not mention the strength of the euro, which was discussed at the last ECB meeting.

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