Weekly Update 08/30/2024: Inflation Remains Mild
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Durable Goods
The Commerce Department reported Monday that orders for durable goods for July, which are items meant to last at least three years, rose 9.9%. Excluding transportation equipment, orders fell 0.2%. Uncertainty about the presidential election and the subsequent business environment has caused firms to hesitate concerning expansion plans. While Federal Reserve rate cuts are likely in the fall, factory production may struggle in the coming months as business leaders focus on consumer confidence in the later parts of the year. The headline number was driven by defense aircraft, which was up by 12.9% for the month, versus a 4.8% decline in the prior period. Both core orders and shipments were down meaning that both are negative on an annualized basis to start the third quarter. The bottom line is that excluding the volatile transportation group, this is another data point which is trending lower on the business front.
GDP and Labor Market
The Bureau of Economic Analysis (BEA) reported that revised second quarter gross domestic product figures were slightly better than initially reported. GDP rose at a 3% annualized rate during the second quarter, up from the previous estimate of 2.8%. These figures will be revised one more time before a final 2Q data point is recorded. The main reason for the upgrade to the April through June period was the personal spending component rose at 2.9%, versus the prior estimate of 2.3%. Consumer spending comprises about two-thirds of total GDP which means it carries a substantial weight in the calculation. Outlays for health care, housing and utilities and recreation were the main contributors to the boost.
The BEA’s adjustments also revised lower business spending, residential investment, government outlays and net exports. Nonresidential fixed investment dropped from +5.2% in the first reading to +4.6% in the latest figures. Residential investment fell from -1.4% to -2.0%. Regardless, the boost in consumer spending was enough to overcome the weaker activity in these other categories. What’s notable is that the U.S. continues to be the envy of the global economy. Compared to the 2.5% expected U.S. GDP growth in 2024 in a survey of economists by Bloomberg, the Eurozone is stuck closer to neutral with a +0.7% expected growth with the once mighty German engine sputtering at +0.1%. Japan is no better at +0.1%, too. South America is no bastion of growth with Brazil at a respectable +2.1% but Argentina at a distressing -3.7%. The hegemony of the dollar seems safe at this juncture.
On the labor market front, initial unemployment claims in the week ending August 24 fell by 2,000 to 231,000. That figure was slightly below the consensus estimate of 232,000. Florida recorded the largest weekly decline in claims followed by Texas and California. Meanwhile, the largest increase came from the state of New York. For the week ending August 17, continuing claims rose by 13,000 to 1.87 million. Continuing claims have been rising since mid-April as those laid off find it increasingly difficult to land new jobs. These trends have supported the market’s belief that the Fed will begin to reduce its benchmark interest rate range at its next meeting scheduled for next month.
Personal Consumption Expenditures
The Fed’s preferred measure of inflation is the PCE released by the Bureau of Economic Analysis. The latest data was released this morning showing that in July, inflation rose at a mild pace of 0.2% compared to the month prior. That was in line with expectations and slightly above the 0.1% gain in June. The core index, which removes volatile food and energy items, rose 0.2% which matched expectations and was even with the prior month’s reading. On an annual basis, the headline figure rose 2.5% and the core metric up 2.7%. On a three-month annualized basis, the core advanced only 1.7%, the slowest this year.
Personal incomes rose 0.3% which was higher than the 0.2% consensus forecast. Personal spending was in-line with expectations at +0.5% as the savings rate slipped to 2.9%, the second-lowest reading since 2008, as consumers turn to credit to maintain a certain lifestyle. That raises the question of durability of consumer spending going forward and the need for lower interest rates to support such outlays. Nonetheless, the news on inflation was quite good. Services inflation excluding expenditures for housing and energy rose 0.2% last month which translates into a 3.25% annualized rate, which is the slowest in over three years.
The Bloomberg Economics team published a note following the PCE release: Bottom line: The headline figures in the July personal income and outlays data are mostly rosy, but details of the report show an economy that’s increasingly fragile. Spending growth was largely supported by a one-off recovery in car sales and consumers cutting back on saving while they still can. But a cooling labor market sets the stage for a slowdown in income growth in coming months, and we think consumers will become more cautious in their spending behavior, taking the steam out of economic growth in the second half of the year. The Bloomberg team has been predicting a slow down for some time in the economy.
All eyes now turn to next week’s August employment report. Current expectations show nonfarm payrolls expanding by 163,000 after July’s 114,000 gain. The unemployment rate is expected to fall to 4.2% from 4.3%. Average hourly earnings are expected to rise 3.7% year-over-year, an acceleration from June’s 3.6% pace. The Fed and economists in general have been flummoxed by the post-pandemic labor market. Job growth seems to remain stubbornly high even with pandemic spending removed, job openings declining and a slowly increasing unemployment rate. Last week’s revisions to prior month’s reports seems to show that statistical techniques may need some tweaking to better estimate labor market trends. Yet, the “eye test” continues to show full airplanes, crowded restaurants, the return of the business road warrior and sold-out Taylor Swift concerts. University of Michigan consumer sentiment data released today showed that metric rose to 68.1 in August versus 67.8 last month, representing the first rise in five months. Granted, people may be spending beyond their means, but, despite well-worn griping about the cost of eggs and milk at the grocery store, it doesn’t feel like recessionary times. The Fed’s upcoming decision will go a long way toward setting the tone for the remainder of the year. Stay tuned!
Company Events
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