This was a HUGE week for economic news. In the same week the second quarter gross domestic product (GPD) was announced, the Federal Open Market Committee (FOMC) held one of eight annual meetings, shared their economic outlook and plans to unwind Quantitative Easing, Part III (QE3) and a consumer confidence report was released. Like space enthusiasts searching for the first substantive UFO sighting, economists, traders, investors, government officials and anyone searching for brighter days searched feverishly for substantive signs of economic improvements. Unfortunately, much like UFO sighting, some data seemed farfetched and unsubstantiated.
Markit kicked off the week with its preliminary services Purchasing Managers Index for July, which remained unchanged since June at 61.0. This was the first report to show the service sector’s continued expansion, though at a slower place, 56.1 in June to 52.8 in July. While additional jobs is certainly good news and indicates where job seekers should seek jobs, service sector jobs often offer lower wages, fewer hours and less security than jobs in other sectors.
Then, the National Association of Realtors continued its string of bad news by letting the country know that housing is still in a slump. The pending home sales index for June was down to 102.7 from 103.8 in May, but still in positive territory. Rates have remained somewhat steady, but home prices and loan application requirements increased, which is the cause for the flat to downward trend.
The Lone Star State continued to flummox liberals, like the 50 Shades of Gray preview did Kathie Lee and Hoda, as the Texas Manufacturing Outlook Index increased to 19.1 in July, up from 15.5 in June, and suggested an increase in factory activity.
On Tuesday, the S&P/Case-Shiller Home Price Index confirmed the National Association of Realtors Index for an ever more sluggish housing market when it reported a 9.3 percent annual increase in May, down from 10.8 percent in April. This continued a positive, downward trend. Buyers should sit on the sidelines for a minute, as the housing market may soon become yours.
Later on Tuesday, one of three big reports of the week was released. The Conference Board’s Consumer Confidence Index surprisingly increased to 90.9 in July, up from an upwardly revised 86.4 in June. Broken down, the Present Situation Index increased to 88.3 from 86.3 and the Expectations Index rose to 92.7 from 86.4. Given its name, it’s clear consumers feel better about current and future economic prospects. Much of the improved feelings can be attributed to an improving jobs market. Our concern is that, kinda like Sharknado’s movie reviews compared to reality, consumer confidence is exponentially better than the jobs market suggests. Don’t get overzealous with spending and look out for flying sharks.
Wednesday started out with a whimper when the Mortgage Bankers Association reported that new purchase applications were up only 0.2 percent and refinance applications down another 0.4 percent for the week ended July 25th. Much of housing’s struggle, as we later learned, is due to stagnant incomes. Stagnant incomes reduce Middle America’s ability to buy homes and eliminates all the residual spending the purchase of a new home causes. Likewise, a depressed housing market depresses household net worth. Interest rates, meanwhile, held steady for the third straight week.
Read last week’s #MoneyConscious Mash Up and spot more long-term trends.
Next the Federal Reserve’s Preferred Price Index for the second quarter rose to an annual rate of 2.3 percent between April 1st and June 30th. This is the highest rate in three years and, while good for the economy; it’s hard for Middle America who is dealing with stagnant wages and depressed household net worth. See a theme? Our advice is to be conservative, not necessarily of the voting kind. Save your money and invest. Don’t make drastic career moves. Don’t buy something you can’t afford. Don’t by peaches in panties.
Speaking of Middle America’s money, ADP announced the private sector, led by small business, added 218,000 jobs in July, down from 281,000 in June. This is the fourth monthly increase, but the first month when the pace slowed. Economist hoped for better and so did workers.
The pinnacle of the week, and the second of the three big reports, was of the nation’s second quarter Gross Domestic Product. The Federal Reserve announced second quarter’s GDP came in 6.1 percent higher than first quarter’s GPD of -2.1 percent, at 4 percent even Steven. This is the first estimate of three and we question this estimate, as we question the consumer confidence report. While we agree that the economy is improving, there seems little to support such a drastic turnaround from first quarter to second quarter.
The third piece of big news for the week was the FOMC’s announcement that that rates will remain unchanged and the unwinding of QE3 will continue as planned. The FOMC saw an improved but seriously underutilized labor market. Collectively, the rest of the country said, “No shit!”
By and large, Thursday was mostly about the American worker and it wasn’t pretty. The Challenger Job report first reported that there were 15,453 more layoffs and quits in July compared to June. 18,000 layoffs were for Microsoft alone, while Bill Gates campaigned for immigration reform and pushed the fallacy of a tech worker gap. Gallup then reported that July Payroll to Population remained stable at 45.1 percent. While a stable trend is better than a downward trend, it’s almost like watching a non-existent fight between Orlando Bloom and Justin Bieber. The Bureau of Labor Statistics then reported that the cost of employment was up. While this isn’t necessarily negative news, this freaks business out more than a baby’s first time on a swing and gives them an excuse to either not hire or suppress wages. The Labor Department reported that payrolls and the employment participation rate both remained stagnant. This means that the pace of available jobs hasn’t picked up and, likely, why people who could look for jobs don’t.
The Institute of Supply Management also shared on Thursday that not only is Chicago a tough place to not get shot, it’s also a tough place to work when it’s Purchasing Managers Index dropped 10 points to 52.6 in July from 62.6 in June.
Friday brought about a bunch of economic news itself. The Motor Vehicle Sales report showed an increase from May to June of 1.2 percent and marked the strongest rate since July 2006. The official unemployment rate (U3) for June came in at 6.2 percent, which was below expectations and not nearly as exciting as ordering your Starbucks on an app before you even get to Starbucks. The economy created 209,000 new jobs in June. While that’s commendable, the more accurate U6 report that includes discouraged and part-time workers rose to 12.2 percent.
Despite the struggling job market and, likely related to consumer confidence, it was reported that consumer spending increased 0.4 percent in June. Spending increased in most categories, including gasoline, food and personal spending. While this rate bodes well for the economy, it may put consumers in a precarious position, especially if this spending is with credit cards. The jobs and wages reports don’t support this improvement with consumer spending. Something seems off, like thinking about Joe Biden skinny dipping.
Markit’s Purchasing Managers’ Manufacturing Index stayed above the 50 mark and suggested economic expansion, but dropped to 55.8 in July from 57.3 in June. This is, yet, another concern. Lastly, Reuter’s/University of Michigan’s Consumer Sentiment Index reported it increased 0.5 in July to 81.8, up from 81.3 in June. This, too, seems incongruent with this week’s other data.
Our take remains consistent. QE3 continues to falsely inflate the economy and as it unwinds the economy will continue to be volatile, which is why it remains one of our three concerns. Jobs and wages remain our other two concerns. The middle class is getting squeeze and, for this reason, expect a lot of pandering to the middle class in the coming election. Save and invest wisely. These are good tenants to follow in any economy, but are important for survival in today’s economy.
That’s this week’s #MoneyConscious Mash Up. Due to all the big data that came out this week, we’ve cut out the personal finance (PF) section. This should give you enough to think about. We’ll bring back the PF section next week. Speaking of which, come back every Saturday for our slightly slanted take on all things finance to help you get your finances straight.