U.S. Consumer Spending Rises 0.5% in August Stronger Household Spending Could Support Continued U.S. Economic Growth
Household outlays rose a seasonally adjusted 0.5% in August from the prior month, rebounding from a flat reading in July, the Commerce Department said Monday. Spending rose 4.1% from a year earlier, slightly faster than the pace seen in prior months. Personal income rose 0.3% in August from the prior month, but income growth has accelerated only modestly this year as U.S. wages rise more slowly than they did before the 2007-2009 recession.
(…) Americans’ estimated spending on services rose 0.5% in August. Spending on goods rose 0.4%, including a 1.8% jump in purchases of durable goods like automobiles. (…)
The Federal Reserve’s preferred inflation gauge, the personal consumption expenditures price index, rose 1.5% in August from a year earlier, slipping from a 1.6% annual gain in July. Excluding the often-volatile categories of food and energy, the index rose 1.5% in August from a year earlier.
Haver Analytics’ table and chart show that the consumer is in an OK and steady shape: nominal income growth is 4% annualized since June, +2.8% real, in line with real spending.
An index of pending sales of existing homes, reflecting purchases under contract but not yet closed, fell 1% to 104.7 in August from July, the National Association of Realtors said Monday. (…) it was 2.2% below its August 2013 level.
I have often written that real estate is a local market and that national data can be misleading. Haver Analytics’ table shows that excluding the West, the housing market is showing no signs of turning up:
(…) For now, the evidence is finally mounting that the highly anticipated new age in US manufacturing may be happening, though the jury is out on how long it will last. Let’s review the relevant data:
(1) One of the strongest components of real GDP in recent quarters has been real capital spending on industrial equipment. It is up 14.7% y/y through Q2, the fastest such pace since Q4-2011.
(2) Industrial machinery orders soared to a record high during July. They are up 37.3% y/y. Nondefense capital goods orders excluding aircraft rose to a record high during August.
Eurozone PMI survey data diverged from official gross domestic product (GDP) in the second quarter of 2014. This paper explores whether this represents a failure of the PMI to forewarn of a weakening of the region’s economy, and possibly the start of a new recession, or whether the official data are understating underlying economic health.
The evidence we have found so far points to the latter, meaning we anticipate a rebound in third quarter GDP to confirm the PMI survey’s more upbeat signal. But any upturn in GDP should be treated with caution.
Official data from Eurostat showed GDP unchanged in the second quarter of 2014. The flat reading had come as a surprise after PMI data (covering manufacturing and services) had signalled growth of roughly 0.4%.
The first observation to make is that there is usually a close relationship between PMI and GDP data, and divergences to the extent seen in the second quarter are unusual. (…) The PMI in fact exhibits a correlation of 84% with the quarterly rate of change of eurozone GDP. The regression has an adjusted r-squared of 0.72 with a standard error of 0.36.
(…) A second observation is that, while the PMI data do not always pick up sudden volatile quarterly changes in GDP, the GDP data inevitably come back into line with the PMI. This suggests that the PMI provides a steadier, less noisy, guide to the underlying trend in economic growth than the official GDP data. (…)
We find that these short-lived divergences between the PMI and GDP usually reflect special factors that have affected the GDP data, and in particular often extreme or unusual weather. Historically, we can see that the PMI tends to be less affected by extreme weather than the official data, thought to be due in part to many companies making an appropriate allowance for weather-related disruptions to provide a more useful guide to actual underlying business conditions.
Other divergences can be attributed to GDP being affected by swings in sectors not covered by the PMI surveys, notably such as Germany’s withdrawal from
nuclear energy production, the exclusion of government spending from the French PMI data and the exclusion of the struggling construction sector from the Spanish PMI data in recent years.
Digging deeper into the national data highlights how the second quarter divergence was seen in Germany, Italy and Spain (see table 1). We can find a number of factors that can help explain the weakness of GDP data in the second quarter of 2014, some of which are specific to 2014 and some which are longer term issues.
- ‘Bridging holidays’: May saw two public holidays fall on Thursdays (Labour day on 1st May and Ascension Day on 29th May). While these are accounted for in normal seasonal adjustment estimations, many people also took the Friday off work to “bridge” the holiday over the weekend. This is thought to have led to a far greater than usual drop in output during the month. Similarly, June saw a holiday on the 19th fall on a Thursday.
- Weather: the second quarter saw a pay-back after mild weather had boosted GDP in the first three months of the year. The first quarter (and winter in general) saw significantly above-average temperatures across many parts of Europe, and notably the northern countries. Many projects, especially in construction, were able to be started earlier in the year than usual as a result. According to Destatis, “Gross fixed capital formation in construction fell markedly by 4.2% [in Germany in Q2], one of the probable reasons being anticipatory effects in the first quarter caused by the unusually mild winter of 2013/2014”. German GDP was in fact flat in Q2 if construction is excluded.
- Energy: the mild winter weather also caused energy consumption and production to be lower than usual, dragging GDP below the PMI’s signal (energy production is excluded from the PMI survey coverage).
- Government spending: a factor in Q2, as well as a longer-term issue since the financial crisis, is the ongoing upturn in government spending in some
countries. In France, as a key example, GDP was unchanged in the second quarter of 2014 but in fact fell by 0.2% once government spending is stripped out. Rising government spending is in fact a significant factor explaining a longer-term divergence between the French PMI and GDP since the financial crisis. (…)
- Spanish building: in addition to the weather related issues affecting construction, the omission in coverage of the building sector in Spain has been a contributory factor to the PMI survey understating growth relative to the headline GDP number in recent years. (…)
We conclude that GDP and the PMI only tend to diverge to an extent similar to that seen in the second quarter of 2014 due to special factors which affect GDP. We note that two major factors, unusual weather and changes in the number of working days, in particular are likely to have affected the GDP numbers in the three months to June. Bearing in mind the historical accuracy of the PMI in anticipating GDP, and the survey’s low noise-to-signal property, it is reasonable to assume that the GDP temporarily understated economic growth in the second quarter and that a recovery will be seen in the third quarter, given recent PMI values.
Our regression analysis indicates that the PMI is signalling a 0.25% expansion of GDP in the third quarter of 2014, a calculation which includes flash data for September. We therefore expect GDP to rebound from the downturn seen in the second quarter, and growth recorded by the GDP numbers could be stronger than the PMI signal if the bridging-holiday factor reverses. The weather factor should not affect the third quarter outcome, as the second quarter weakness was a payback from an unusually strong first quarter, meaning this effect has already played out.
However, any improvement in GDP in the third quarter should be treated with caution. With the flash PMI for September indicating that growth had slowed to the
weakest seen so far this year, the survey suggests that the underlying rate of growth in the eurozone economy is fading once again.
Third quarter ‘flash’ GDP data are not published until 14 November.
Retail sales in August rose 2.5% in inflation-adjusted terms, compared with July, sharply outperforming analysts’ forecasts’ in poll by The Wall Street Journal that forecast a 0.5% increase. The data followed a revised fall of 1.1% in July from a first estimate showing a 1.4% drop. The data are also adjusted for seasonal variations in spending. The increase in August is the biggest one in adjusted terms since a 2.6% expansion in June 2011.
On an annual basis, retail sales were up 0.1% in real terms, the statistics office Destatis said. In the first eight months of the year retail sales grew 1.2% compared with the same period last year.
The number of German unemployed rose 12,000 in September after adjustment for seasonal variations in the data after an upwardly-revised rise of 3,000 in August. Analysts in The Wall Street Journal’s survey had forecast a decline of 2,000.
Other parts of the report were more upbeat. The unemployment rate was 6.7%, unchanged from August. Employment levels reached a record high in August, said ING economist Carsten Brzeski. (…)
Christian Schulz, senior economist at Berenberg, said that as wages are rising at 2% to 3% a year while inflation was just at 0.8% in annual terms in September, so household purchasing power is increasing “substantially.” (…)
Meanwhile, French consumer spending rebounded in August after a fall in July, statistics agency Insee said Tuesday. Consumer spending in the eurozone’s second largest economy rose 0.7% in August from July, reversing that month’s decline, Insee said. The gain was driven by higher food and automobile spending.
Germany and France account for half of the eurozone’s gross domestic product, growth in which stalled during the second quarter.
CHINA NOT BOUNCING BACK
CEBM’s October survey results indicate that most industries have not observed strong sales in the traditional peak season of September due to weak demand.
Our survey shows that steel, machine tools, construction machinery, and vehicle sales were much lower than expected. Demand for steel and machine tools continues to shrink, and sales declined further. Cement, real estate, and banking saw marginal growth, but the strength expected coming into the peak season did not materialize.
Real estate volume shows seasonal improvement, but industry fundamentals remain weak after excluding seasonal factors. (…) Export shipments saw no increase Y/Y or M/M, while the consumer industry has shown no significant improvement as it trends downward.
Looking to October, (…) expectations for steel, autos, city and commercial banks, and the entire consumer and exports industries, marginally weakened.
A sell-off in emerging markets currencies deepened on Monday as political concerns exacerbated fears that many countries will suffer a double blow of slowing growth in China and rising interest rates in the US.
The Brazilian real sank to its lowest level against the dollar since 2008 after polls showed president Dilma Rousseff – whose interventionist economic policies have unnerved investors – gaining on her opponents in the run-up to Sunday’s presidential election.
Russia’s rouble, already down some 20 per cent since the start of the year, slid further, nearing the level that would trigger central bank intervention to defend the currency.
But a rally in the dollar that began in July has broadened to hit emerging markets that do not face considerable political risk. Indonesia’s central bank said on Monday it had intervened in foreign exchange markets to limit a sharp fall in the rupiah, which lost more than 1 per cent against the dollar, hitting a seven-month low.
The Mexican peso and South Korean won are among the worst performing currencies over the past week, while the Turkish lira and South African rand have fallen to their lowest levels against the greenback since late January. By one gauge – JPMorgan’s EMCI index – emerging markets currencies have now fallen below their 2007 nadir.
Emerging markets are also vulnerable to a Chinese slowdown that will hit regional trade partners and commodity producers. (…)
Data on fund flows and bond holdings suggest that most investors who piled into emerging markets carry trades earlier in the year have not yet fled these positions.
Manik Narain, strategist at UBS, said many still felt that the impact of US policy tightening would be offset by further easing from the European Central Bank and Bank of Japan. (…)
Ford Sharply Cuts Earnings Outlook Ford warned operating profit this year would be sharply below its earlier estimate, citing auto-safety recalls in the U.S. and economic weakness in Europe.
(…) The nation’s no. 2 auto maker said it expects before-tax earnings of between $6 billion and $7 billion for the full year, compared to a January forecast of between $7 billion and $8 billion.
Ford’s shares were off 7.5% at $15.11 in 4 p.m. New York Stock Exchange trading and continued to drop in late trading. It earned $8.57 billion before taxes last year on revenue of $146.9 billion.
Executives also gave a gloomier-than expected view of its operation in Europe, which has been losing money. The company’s Europe chief, Stephen Odell, said the company will lose $1.2 billion in the region this year on a pretax basis, and will follow that up with a pretax loss of $250 million next year.
(…) Weakness in Russia and changes in interest rates are the key reasons results in the region will be worse than initially expected, he said. (…)
Why Peak-Oil Predictions Have Run Dry More experts now believe technology will continue to unlock new sources and expand supplies for decades to come.
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