Economic Perspective – August 2014

The Month in Review

• The U.S. economy grew slightly faster during the second quarter than previously thought. The Bureau of Economic Analysis said the 4.2% initial estimate of gross domestic product was revised upward from 4% primarily because of an increase in the value of commercial construction and business investment in equipment. Meanwhile, corporate after-tax profits rebounded from Q1’s -16.3% decline, rising 8.3% during Q2.
• The unemployment rate remained at its lowest level in almost six years (6.2% in July), which is more than a full percentage point below a year earlier. The Bureau of Labor Statistics also said the 209,000 new jobs added to payrolls in July roughly equaled the average monthly job gains over the last year.
• Despite the improved job market, the Federal Reserve still had plenty of leeway to maintain the measured pace at which it’s been winding down bond purchases. Assuming the process continues at its current pace, new bond purchases are expected to come to a halt in October. And at the Federal Reserve’s annual Jackson Hole symposium, Chair Janet Yellen cited continued slack in the labor market as one reason not to accelerate any interest rate increases.
• A 318% increase in orders for commercial aircraft led to a 22.6% surge in durable goods orders in July. The Commerce Department said that excluding transportation, orders actually fell 0.8%, while business investment in equipment was down 0.5% after a strong gain the previous month. Also, the Federal Reserve said a surge in auto manufacturing helped push industrial production to its sixth straight month of gains.
• The housing recovery seemed to be leveling off. Sales of new homes fell 2.4% in July, according to a Commerce Department report. That raised questions about the state of the housing market, especially since the National Association of Realtors^® had reported the previous week that home resales had actually risen 2.4% during the month. Meanwhile, home prices in cities measured by the S&P/Case-Shiller 20-City Composite Index gained 1% in June, but all 20 cities experienced slower annual growth rates for the first time since February 2008. However, the future could be more promising; the Commerce Department said both housing starts and building permits were up strongly in July.
• Increases in the cost of food and shelter were partly offset by lower airline fares and the first decline in energy costs since March. The 0.1% increase in the Consumer Price Index was the smallest since February, according to the Bureau of Labor Statistics, and wholesale prices rose by the same amount. Meanwhile, the Commerce Department said retail sales were essentially flat for the month.
• Tensions stemming from the conflict over Ukraine continued to escalate. Russia banned many food imports from Europe, the United States, and several other countries in retaliation for tougher Western economic sanctions. Russian officials also raised the specter of increased retaliation against U.S. corporations after they shuttered eight McDonald’s restaurants for alleged sanitary violations.
• The eurozone economic recovery stalled in Q2 as both Germany and Italy saw declines (Italy actually fell back into recession) and unemployment remained at 11.5%. However, the larger 28-member European Union’s GDP increased by 0.2%, and European Central Bank President Mario Draghi expressed willingness to consider additional economic stimulus, possibly as early as the ECB’s September 4 meeting.

Eye on the Month Ahead

Investors will watch to see if equities can sustain gains after light trading volumes rise to more typical levels once traders return to their desks from vacation. As the anticipated end of QE3 draws nearer, traders will focus on the Fed’s September 17 announcement; any guidance on the timing of future interest rate hikes could move markets.

Source: Broadridge