The first set of data for the third quarter has been more positive than negative. Last week we saw solid employment numbers and business sentiment. This week, the positives continued to outweigh the negatives. Even revisions of key second-quarter data points are now showing that the economy may have in fact expanded at closer to 3% versus a much lower 2.3% estimate from the Bureau of Economic Analysis’ (BEA’s) first release. The trend so far since the last Federal Open Market Committee meeting has been consistent with a September liftoff of raising rates, though it remains a close call whether the recent plunge in commodity prices, dollar strength, and remaining uncertainties over the outlooks for China and Greece will prompt a delay in the first expected quarter-point hike from the Fed.
The economic releases this week include:
- Retail sales rose 0.6% in July after coming in unchanged (was negative 0.3%) in June. Core retail sales (excluding autos, gasoline, and building materials) rose 0.3% in July, following a 0.2% increase in June. Total retail sales in July were up 2.4% year over year.
- Industrial production climbed 0.6% in July after inching up 0.1% (was 0.3%) in June. Manufacturing output rose 0.8%, but excluding the motor vehicles output, manufacturing was up only 0.1%. The capacity utilization rate rose to 78% in July from 77.7% the previous month.
- Wholesale inventories climbed 0.9% in June following a revised 0.6% increase (was 0.8%) in May and grew 5.4% year over year. Wholesale sales inched up 0.1% in June after edging up 0.2% in May. Wholesale sales fell 0.5% year over year.
- Business inventories climbed 0.8% in June after rising 0.3% in May. Business sales edged up 0.2% in June following a 0.4% increase in the previous month.
- Labor productivity rose at a seasonally adjusted annual rate of 1.3% in the second quarter following a revised 1.1% decrease (was negative 3.1%) in the first quarter. The unit labor costs rose 0.5% in the second quarter after a downwardly revised 2.3% increase (was 6.7%) in the first. Productivity edged up 0.3% year over year in the second quarter and output climbed 2.8% year over year.
- Producer prices edged up 0.2% in July after climbing 0.4% in June. The core producer price index (excluding food and energy prices) rose 0.3% in July, matching the previous month’s rate. The producer price index was down 0.8% year over year in July. The core PPI also slowed to 0.6% in July.
- Import prices fell 0.9% in July after coming in unchanged in June. Export prices edged down 0.2% in July after falling 0.3% in the previous month. On an annual basis, import prices were down 10.4% in July, while export prices were down 6.1%.
- The federal government budget deficit widened by $54.6 billion year over year in July to $149.2 billion. The year-to-date deficit in fiscal 2015 is $465.5 billion. Government receipts increased by $11.0 billion (or 5.1% year over year) in July. Meanwhile outlays grew $65.6 billion (or 21.2% year over year).
- According to New York Fed’s Quarterly Household Debt and Credit Report, aggregate household debt balances were unchanged in the second quarter of 2015. As of June 30, 2015, total household indebtedness was $11.85 trillion. Overall household debt remains 6.5% below its third-quarter 2008 peak of $12.68 trillion. Mortgage debt fell while consumer credit and auto loans rose in the quarter. Even as overall debt balances remained steady, the proportion of debt that was delinquent continued to decrease–to 5.6% from 5.7%. This share is still elevated from prerecession levels. Bankruptcies increased slightly over the previous quarter, which had seen the lowest level since before the recession; still, they are down a significant 14% year on year.
- The preliminary reading of the University of Michigan consumer sentiment index came in at 92.9 in August compared with the final July reading of 93.1.
- Initial jobless claims edged up to a seasonally adjusted 274,000 in the week ended Aug. 8 versus 269,000 (was 270,000) the week before. The four-week moving average fell to 266,250 in the week ended Aug. 8 from 268,000 (was 268,250) the week before. Continuing claims increased to 2.27 million in the week ended Aug. 1.
Second-quarter real GDP growth was 2.3% in the first release by the BEA, lower than our forecast of 2.8%. However, with the upward revisions of key data points that have come out since the first release, we expect the second-quarter real GDP growth to be revised up–close to 3%. We continue to expect the economy to grow on average at a 3%+ pace during the second half of this year. We see a high rate of inventory accumulation during the first half and weak growth in international demand for U.S. products posing a drag in second half growth. On the other hand, we look for consumers to carry the economy to the finish line. The outlook for consumer spending is bright due to real disposable income gains, modest consumer price inflation, lower energy prices, relatively good employment gains, and a housing market that is gaining traction.