After weak GDP, attention turns to July jobs report

Economists aren’t known as a cadre of optimists — after all, the profession carries the nickname “the dismal science” — but they certainly expected more out of the U.S. economy in the second quarter than it had to give.
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Economists aren’t known as a cadre of optimists — after all, the profession carries the nickname “the dismal science” — but they certainly expected more out of the U.S. economy in the second quarter than it had to give.

Economists aren’t known as a cadre of optimists — after all, the profession carries the nickname “the dismal science” — but they certainly expected more out of the U.S. economy in the second quarter than it had to give.

Forecasts were for growth of about 2.5 percent, but the Commerce Department reported Friday that the economy grew at an annualized rate of just 1.2 percent after a gain of only 0.8 percent in the first quarter.

“We’re just muddling through," Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities in New York, told Bloomberg.

LaVorgna had forecast a 1 percent second-quarter gain. Bloomberg noted that consumers were resilient during the quarter, but businesses were cautious.

“Consumer spending looks good, but the problem is that the rest of the economy is soft,” he added. “The economy remains vulnerable to downside risks. The Fed is right to be cautious."

Further analyzing the economy, Reuters said three consecutive quarters of growth near just 1 percent suggest that the economy is at risk of stalling. Nonetheless, economists expect forward momentum in the second half of the year because they think consumer spending will remain strong.

“The U.S. economy just went through a meaningful inventory correction cycle," Harm Bandholz, chief U.S. economist at UniCredit Research in New York, told Reuters. "In the past, those developments have even led to recessions, but given that potential growth is slower these days and that other headwinds occurred at the same time, one may actually be tempted to highlight the economy's resilience."

Indeed, consumer behavior and U.S. consumers’ mood — at least as reflected by the Conference Board’s Consumer Confidence Index — showed just that last week. The Commerce Department said new-home sales rose in June to a seven-year high, climbing 3.5 percent to a seasonally adjusted annual rate of 592,000.

The median price of a new home jumped to $306,700, 6 percent higher than a year earlier.

The report “confirms the considerable strength in the housing market over the past few months,” wrote Barclays analyst Rob Martin, MarketWatch said in a report.

“Despite some softness in prices reported [on July 26], the housing market remains healthy. We expect housing to continue to firm, on average, over the medium term, with a buoyant household sector supporting both prices and volumes.”

The Consumer Confidence Index was at 97.3 for July, nearly even with a revised June reading of 97.4, and the Wall Street Journal said that was a sign consumer spending could continue to buoy the economy.

The Journal quoted Andrew Hunter, assistant economist at Capital Economics, as saying the higher-than-expected reading suggested “consumption growth will continue at a decent pace in the third quarter.”

“The continued strength of consumer confidence supports our view that an acceleration in hourly wage growth, along with further gains in housing and equity prices, will ensure that spending continues to grow at a solid 2 percent to 2.5 percent annualized pace over the rest of this year,” Hunter said in a note to clients.

The Conference Board certainly saw its July survey results as positive.

“Consumer confidence held steady in July, after improving in June,” Conference Board director of economic indicators Lynn Franco said in a statement.

“Consumers were slightly more positive about current business and labor market conditions, suggesting the economy will continue to expand at a moderate pace. Expectations regarding business and labor market conditions, as well as personal income prospects, declined slightly as consumers remain cautiously optimistic about growth in the near term.”

On Friday the University of Michigan’s final Consumer Sentiment Index for July was at 90, above the mid-month estimate of 89.5 but disappointingly below the June reading of 93.5.

“Although confidence strengthened in late July, for the month as a whole the Sentiment Index was still below last month’s level, mainly due to increased concerns about economic prospects among upper-income households,” Richard Curtin, chief economist for the university’s Surveys of Consumers, said in a statement.

“The Brexit vote was spontaneously mentioned by record numbers of households with incomes in the top third (23 percent), more than twice as frequently as among households with incomes in the bottom two-thirds (11 percent). … While concerns about Brexit are likely to quickly recede, weaker prospects for the economy are likely to remain. Uncertainties surrounding global economic prospects and the presidential election will keep consumers more cautious in their expectations for future economic growth,” Curtin added.

The coming week will provide further clues to the consumer’s mood with reports on personal income and consumer spending for June and motor vehicle sales for July.

At the end of the week comes the jobs report for July. The economy added a robust 287,000 jobs in June. Bloomberg reported that economists believe employment probably rose by a moderate 175,000 in July and that the jobless rate will hold steady at 4.9 percent.


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