U.S. Economy Slogs Through Global Woes, So Far Consumers step up as job market stays strong and gas prices sag, but the outlook remains murky
The latest sign of resilience came Thursday when the government reported sales at U.S. retailers shot up 0.6% in July as Americans shelled out more for cars, sofas, clothing and bar tabs. A separate report showed the four-week moving average of unemployment claims, a proxy for layoffs, touched a 15-year low, underscoring the labor market’s recent run of stability. (…)
Thursday’s retail-sales report showed that consumer spending at service stations has fallen 15% over the past year. Spending at all other retailers climbed 4.5%, and the biggest beneficiaries have been restaurants and bars, furniture stores and online outlets like Amazon. (…) (Chart and table below from Haver Analytics)
U.S. Import Prices Fall on Weak Oil Prices, Stronger Dollar
Import prices decreased 0.9% in July from a month earlier, the Labor Department said Thursday. From a year earlier, import prices are down 10.4%.
Outside petroleum, import prices were down 0.3% last month and 2.8% from a year earlier. That is the largest year-over-year decline in the measure since October 2009.
Prices for consumer goods other that autos fell 0.3% last month. The cost of imported cars and food were unchanged. The index for capital goods—machinery, heavy trucks and the like—fell 0.2%. (Chart from Haver Analytics)
U.S. HOUSING
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Housing recovery restrained by tight lending standards
The process of re-leveraging continues in the US. Latest data from the New York Fed showed a seventh increase for household debt in eight quarters, with a US$2 billion increase in Q2. Debt relating to credit cards, student loans and autos (the latter hitting US$1 trillion for the first time) all continued to rise. The overall debt increase could have been much higher were it not for mortgage balances which plunged US$55 bn in Q2. So much so that last quarter the share of mortgages in total debt fell under 68.5% for the first time in a dozen years.
So, why are mortgage balances not soaring despite rising household formation, a hot labour market and record low interest rates? Perhaps, the trauma of the last housing crash is still fresh in the minds of potential first-time home buyers who end up opting for rentals instead. That partly explains why the rental vacancy rate and the homeownership rate are both at their lowest in at least three decades. Those first-time home buyers who are able to get over that psychological barrier are then confronted by other obstacles such as tighter lending standards which pose a problem especially for those holding student debt. After being burnt by lax lending during the subprime crisis, banks have seemingly gone to the other extreme and giving mortgages mostly to borrowers with the highest scores. As today’s Hot Charts show, about half of new mortgage originations now go to borrowers with scores 780 and above.
Contrary to popular belief, millennials are not shunning homeownership. According to Fannie Mae’s National Housing Survey™ (NHS), the vast majority of millennial renters plan to buy a home at some point in the future, but seem to be exercising caution from a financial perspective. This caution may support more sustainable housing costs for consumers and a healthy market overall.
While the financial crisis may have stalled wage growth for younger renters, recent improvements seem to be reflected in consumer perceptions, with increasing shares in Fannie Mae’s second quarter survey saying that their household income is significantly higher now than a year ago. The improvements are an encouraging sign for millennial renters aspiring to homeownership and the housing market in general.
Our survey indicates that millennial renters today have as much desire to own a home as the general population of renters. According to the NHS data, a heavy preponderance of renters age 25 to 34 say that owning makes more sense than renting from a financial perspective. A majority also agree that owning makes more sense than renting from a lifestyle perspective. The overwhelming majority of millennial renters tell us they plan to own a home at some point in the future.
Housing and demographics are inextricably linked. Speculating on the preferences of millennials, the largest generation in U.S. history according to some estimates, is a daily occurrence in the media. Some argue that millennials are less interested in homeownership than previous generations, preferring the flexibility of renting.
The NHS responses suggest the real question is if and when millennials will be able to act on their plans to own. Most renters, including those age 25 to 34, think it would be difficult for them to get a mortgage today. Millennials and other renters cite financial hurdles, suggesting that they must see sustained growth in income before they become first-time home buyers.
Top Criteria for Timing a Home Purchase (3Q to 4Q 2014)
Households With Income Up Significantly in Last 12 Months
They most often consider their personal finances, particularly their income growth,as the primary factor when choosing the right time to buy. Even lifecycle reasons such as marriage and children, often associated with first-time home buying, are less likely than financial factors to determine the right time to buy for millennial and other renters.
Eurozone Economic Growth Slows The eurozone’s modest economic recovery suffered a setback last quarter as France stagnated and Germany posted a tepid expansion, underscoring deep-rooted fragility in the region.
Gross domestic product growth in the eurozone slowed to 0.3% from 0.4% in the first quarter, the European Union’s statistical agency said Friday, falling short of economists’ forecasts of a 0.4% gain. GDP grew 1.3% on an annualized basis, Eurostat said.
Germany’s quarterly growth rate quickened to 0.4% in the second quarter from 0.3% in the first, falling short of economists’ forecasts of 0.5% growth. Output in France stagnated after a strong jump in the first three months of the year. The Italian and Dutch economies grew, but just barely. (…)
Germany’s GDP report didn’t include a component breakdown, but statistics agency Destatis said net exports were the main driver of activity in the second quarter, as foreign trade got a boost from a weaker euro exchange rate, which makes eurozone goods more competitive elsewhere. But economic growth was held back by weak investments, particularly in construction, it said. (…)
Spain’s GDP expanded 1% on a quarterly basis, the fastest among the large eurozone economies, suggesting it is recovering from a severe housing collapse that crippled its economy in the wake of the global financial crisis. (…)
Gross domestic product rose 0.2 percent from the first quarter, when it registered a 0.3 percent increase, national statistics institute Istat said in a preliminary report Friday. The second-quarter expansion was lower than the median forecast of 0.3 percent by 18 economists in a Bloomberg News survey. The euro area’s third-largest economy rose 0.5 percent from a year earlier.
ECB signals inflation turning point
In a cautiously optimistic set of accounts for the governing council meeting in mid-July, the ECB pointed to a “growing number of indications that a turning point [on inflation] might well have been reached”. It was premature to draw a firm conclusion, however, and “additional observations would be needed”.
Peter Praet, the central bank’s chief economist, pointed to data from the purchasing managers’ indices, a poll seen as an indicator of economic developments, which showed input prices and expectations about selling prices were up. Mr Praet also flagged a slight rise in inflation expectations.
However, others members of the 25-member council said it was “too early to consider inflation expectations were firmly anchored again” and noted that market measures of expectations were still “well below” historical levels.
From the latest Eurozone Manufacturing PMI report:
(…) selling price inflation remained muted, with only a slight increase in charges reported.
From the latest Eurozone Services PMI report:
(…) average selling prices fell for the forty-fourth straight month, albeit only marginally and to one of the weakest extents during that sequence.
China economy: down in the data mine
Emerging-Market Equities Heading Down
The emerging bear.