In a busy week for economic reports, the standout was that the US economy contracted in the first quarter by a 2.9% annualized rate, the most since the depths of the last recession. According to Bloomberg, it marked the biggest downward revision from the agency’s second GDP estimate since records began in 1976. The revision reflected slowdowns in consumer and health care spending. Many economists are saying the drop was not reflective of the broader fundamentals, blaming much of the decline on weather. Maybe, but consumers don’t appear to be buying it. Real consumer spending was down 0.2% in April and 0.1% in May, and the weather was good. Durable goods (designed to last long periods) orders were much weaker than expected for May as they fell 1.0% in May after rising 0.8% in April. Transportation was the largest contributor to the decline falling 3.0% after a 1.7% rise in April.
Consumer spending is vital because it represents some 70% of the US economy, so economists and businesses pay close attention to what he is doing and thinking. At least for now, there is a bit of a dichotomy. While spending is slowing, consumer confidence is moving steadily higher, to new recovery highs of 85.2 in June compared to a revised 82.2 in May. It is the fourth straight month that the index has exceeded 80 barrier, according to Econoday. It indicates that optimists significantly outnumber pessimists.
As consumers look ahead in the surveys, they see more jobs opening up six months from now, but they are not as sanguine on their income expectations. There was a significant decline among consumers expecting higher income, down 2.1 percentage points to a soft 15.%, according to Econoday. This week’s report of jobless claims showed slight deterioration in jobs, but continued to point toward incremental improvement overall. The Personal Income report for May showed a moderate 0.4% in May, following a 0.3% advance the month before.
After job security and income security, housing is next on the consumer’s radar. Despite low mortgage rates the housing market recovery continues to under-perform expectations, but my finally be contributing to economic growth. According to Econoday, sales of existing homes jumped 4.9% in May adding to Aprils improvement of 1.5%. This is the first back-to-back gain for this series going all the way back to April and May of last year. The report also showed that the median home price jumped 5.9% in May to $213,400.
Manufacturing by and large continues to do well. The PMI Manufacturing Index showed continuing improvement in May and reinforced the idea that the factory sector is providing increasing leadership for the national economy. A positive sign was that new business was the strongest contributor. Corporate profits on a year-on-year basis were up 6.8 percent, compared to 6.0 percent the prior quarter.
The Fed, in light of recent data has significantly reduced its expectations for 2014 growth to 2.2%. They continue to exhibit far less concern for inflation than they do for economic growth and jobs. Despite Milton Friedman’s admonition that you get inflation when too much money chases too few goods, they seem much more focused on their own inflation gauge which is focused in the wages channel. (Inflation occurs when wages begin rising faster than overall inflation). They may also be concerned about the latest data from the Bureau of Economic Analysis that reveals there has never been a time in US history (spanning 50 years of data) that year-over-year gross domestic income has been at its current pace (2.6%) without the US economy ultimately falling into recession.
This economy has been performing sub-par for years now and people have adapted. It could be that the indicator just mentioned will prove accurate this time, or it could just as likely be that gradual improvement overcomes the pull of gravity and growth is restored to the 3% plus range. Your guess is as good as mine. Just be careful you are not taking more risk than you absolutely need to meet every goal you value.