Growth Rebound Stokes Fed Debate Federal Reserve officials delivered a modestly more upbeat assessment of the economy amid a second-quarter growth rebound and deepening debate inside the central bank about when to start raising interest rates.
Federal Reserve officials delivered a modestly more upbeat assessment of the economy Wednesday amid a second-quarter growth rebound and deepening debate inside the central bank about when to start raising interest rates.
U.S. gross domestic product, a broad measure of the nation’s output of goods and services, advanced at a seasonally adjusted annual rate of 4.0% in the second quarter, the Commerce Department said Wednesday, a significant rebound from a wintry 2.1% contraction during the first three months of the year.
Overall, the economy appears to be neither as weak as was recorded in the first quarter nor as strong as the latest numbers suggest in the second. Compared with a year ago, economic output was up 2.4% last quarter, in line with the modest pace of growth that has characterized much of this recovery. The economy only grew at about a 1% pace for the first half of 2014. (…)
Officials also noted that inflation—which has been running below their 2% goal for two years—is getting closer to the objective and the risks of continued low inflation are diminishing. (…)
The Fed will wait a “considerable time” after bond purchases end before raising rates, the central bank said, reaffirming a position it has had since late 2012.
The Fed also noted that even though unemployment is down, “there remains significant underutilization of labor resources,” by which it means slack that will keep inflation and interest rates low. (…)
Economists from J.P. Morgan Chase and forecasting firm Macroeconomic Advisers project the economy to maintain a growth rate of at least 3% for the rest of the year. The economy hasn’t posted three straight quarters above that mark in nearly a decade.
Like it or not, the government comprises about one-fifth of the U.S. economy and so shrinking budgets directly translate to cuts in GDP. In recent years, what little growth the economy mustered came from the private sector.
…but the biggest factor remains private companies:
(…) this is not just a case of better weather. Evidence indicates that there has also been an underlying improvement in the economy, and that robust growth will be sustained into the third quarter. The most promising signals come from Markit’s PMI surveys, which had surged higher in the second quarter and held at a post-recession high in July. Business clearly continued to boom at the start of the third quarter.
Households are also set to help boost the economy in the third quarter. July survey data showed consumer confidence running at its highest since 2007, with
optimism fuelled by greater job security and rising employment. The unemployment rate has dropped to 6.1%, its lowest since September 2008, with an
average of 231,000 jobs created in each of the first six months of the year so far.
Looking further ahead, an outlook poll conducted by Markit showed that business confidence among manufacturing and service sector companies in the US
about their activity levels over the coming year remained buoyant in the summer, unchanged on the optimistic readings seen at the start of the year.
However, while growth is set to continue into the third quarter, the second quarter’s growth surge may be the best we see this year in terms of the rate of expansion.
The same business outlook survey which showed optimism about business activity holding firm on the buoyant picture seen earlier in the year showed future
hiring and investment intentions falling, with companies focusing on cost control more so than at any time since the financial crisis. Many companies attributed this to uncertainties regarding the cost impact associated with new healthcare reforms. (Markit)
Charles Plosser, the hawkish president of the Philadelphia Fed, held out in a nine-to-one vote because he thought the intention to keep rates low for a considerable time after the Fed stopped buying assets did not reflect “considerable economic progress”. (…)
There was less change than expected in other parts of the Fed’s description of the economy, given the run of strong data that culminated on Wednesday with a 4 per cent reading for annualised growth in the second quarter of 2014.
The statement continues to say that household spending is rising moderately while the housing sector is slow. (…)
More stats FYI (and perhaps Mrs. Yellen’s interest):
- Real final sales to domestic purchasers: +2.8% a.r. in Q2 vs +0.7% in Q1.
- Core PCE deflator, a Fed’s favorite: +2.0% a.r. in Q2.
- Nominal GDP: +4.1% Y/Y vs +3.3% in Q1.
- Nominal Personal Income: +5.9% a.r. in Q2 after +5.0% in Q1.
- Wages and Salaries: +6.6% after +7.7% in Q1.
- Nominal DPI: +6.2% a.r. after + 4.9% in Q1.
- Real DPI: +3.8% a.r vs +3.5% in Q1.
It is now easier to understand this:
(…) Hiring in such fields [$40-60k] has increased 2.9 percent since the start of 2013, outpacing overall employment, according to research by JPMorgan Chase & Co. That marks a respite in a decades-long shrinking of the middle tier as payrolls picked up at the top end of the scale and in low-wage occupations such as food and retail services. (…)
Some 974,000 middle-income positions have been added this year alone. The increase in the number of jobs at mid-wage occupations since the start of 2013 matches the pace of growth in high-wage fields, according to seasonally adjusted data from JPMorgan.
Employment at lower-wage service occupations fell 0.5 percent since January of last year. (…)
Also consider this looking ahead at the important back-to-school season:
And also this chart on Corn prices from Trading Charts:
IF ONLY HOUSING COULD CONTRIBUTE:
Household formation for 2Q declined to a dreadful 0.46m y/y, even more depressed than its five year average of 0.58m. (ISI)
According to RBC Capital, 318 companies (70% of the S&P 500’s market cap) have reported. EPS is on track to rise 8.7% . Earnings ex-financials have surprised by 3.8% so far. Revenues have beaten by 1.2% while margins have contributed 2.6%.
Now, go back to Markit’s survey quoted above. Companies remain very focused on margins.
Euro Inflation Slowed to 0.4% in July, Lowest Since 2009 Euro-area inflation unexpectedly slowed in July to the weakest in almost five years, underscoring the European Central Bank’s concerns that the economy is too feeble to drive price growth.
The jobless rate dropped to 11.5 percent from 11.6 percent in May, the European Union’s statistics office in Luxembourg said today. While that’s still near a record high of 12 percent, it is less than the 11.6 percent median forecast of 31 economists in a Bloomberg News survey.
The number of people out of work dropped a seasonally adjusted 12,000 to 2.9 million in July, the Nuremberg-based Federal Labor Agency said today. Economists forecast a decline of 5,000, according to the median of 31 estimates in a Bloomberg News survey. The adjusted jobless ratewas unchanged at 6.7 percent, the lowest level in more than two decades.
Italy’s unemployment rate fell to 12.3 percent in June in a positive sign for Prime Minister Matteo Renzi’s economic program. Youth unemployment rose to a record high.
The jobless rate rose dropped from 12.6 percent in May, the Rome-based national statistics office Istat said in a preliminary report today.
Joblessness among those between the ages of 15 to 24 rose to 43.7 percent in June from 43.1 percent in May, today’s report also showed. That was the highest since records started in 1977.
Merkel Gives Putin a Blunt Message The frayed relationship between German Chancellor Angela Merkel and Russian President Vladimir Putin shows the disintegration of a decadeslong effort by both nations to bind the World War II adversaries to each other.
(…) The aftermath of the Flight 17 crash on July 17 reinforced a growing frustration in the chancellery and in the German Foreign Ministry: Mr. Putin wasn’t delivering on promises to exercise his influence on the separatists and get them to seriously negotiate a cease-fire.
Since then, Ms. Merkel has put her weight behind sweeping sanctions against Russia’s banking, military, and oil sectors. EU diplomats approved the measures on Tuesday. (…)
Russia lashes out at EU sanctions Moscow warns ‘irresponsible step’ will push up energy costs
Russians largely back their country’s tough stance on Ukraine, which earned Russia more economic sanctions from the U.S. and Europe this week. Nearly two-thirds of Russians surveyed before the latest round of sanctions believe Russia needs to have a “very strong position” in relations with its neighbor. One in five Russians still believe their country needs to have good relations with Ukraine by all means.
Philippines Raises Benchmark Rate for 1st Time in 3 Years The Philippines raised its benchmark interest rate for the first time since May 2011, guarding against inflation risks even as economic growth slowed.
Most hedge funds fail: their average life span is about five years. Out of an estimated seventy-two hundred hedge funds in existence at the end of 2010, seven hundred and seventy-five failed or closed in 2011, as did eight hundred and seventy-three in 2012, and nine hundred and four in 2013. This implies that, within three years, around a third of all funds disappeared. The over-all number did not decrease, however, because hope springs eternal, and new funds are constantly being launched. (John Lanchester in the New Yorker via FT Alphaville)
Buyout Shops Look to Rivals for Deals Private-equity firms are increasingly buying companies from each other, a shift driven in part by the relative simplicity of completing such acquisitions.