Written by Steven Hansen,
For a year, our economic forecast said the economy was slowing. All the while, Real GDP showed a strengthening economy. The advance 2Q2019 Real GDP released the prior week finally began to show a weakening economy. And then this week, the Personal Income and Expenditures annual update provided significant (but not definitive) changes.
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To get a feel how dramatic the changes to Personal Income and Expenditures were – the following sets of graphics show the before and after:
Indexed to Jan 2000, Growth of Real Disposable Income (blue line) to Real Expenditures (red line)
Before:
After:
Seasonally Adjusted Spending’s Ratio to Income (a declining ratio means the consumer is spending less of its Income)
Before:
After:
Seasonally & Inflation Adjusted Year-over-Year Change – Personal Disposable Income (red line) and Personal Consumption Expenditures (blue line)
Before:
After:
Personal Savings as a Percentage of Disposable Personal Income
Before:
After:
The bottom line is that personal income and expenditures [and therefore GDP also] jumps around – and one cannot take any single month, or quarter, or even a year as fixed or gospel. This makes accurately tracking the economy using GDP or personal income and expenditures in real-time impossible – because you cannot believe the trends. Honestly, our economic forecast does a better job of trending the economy than PCE or GDP – and the Chicago Fed National Activity Index (CFNAI) does a better job than PCE or GDP in being more precise in showing the level of economic activity.
Economic Forecast
[Note: The year-over-year real GDP was revised in the 2Q2019 advance estimate released last week. GDP trend lines are now more in align with our forecasts]The Econintersect Economic Index has a long term decline which began in July 2018 – but insignificantly improved this month (August 2019). Our forecast remains close to the zero growth line.
The fundamentals which lead jobs growth continue to show slowing growth trend in the employment growth dynamics. However, we expect jobs growth over the next six months to exceed the growth needed to maintain participation rates and the employment-population ratios at the current levels.
Economic Releases This Past Week
The following table summarizes the more significant economic releases this past week. For more detailed analysis – please visit our landing page which provides links to our complete analyses.
| Release | Potential Economic Impact | Comment |
|---|---|---|
June Personal Income and Outlays | rate of income growth strong | As this month incorporated the results of the annual revision of the NIPA accounts, the overall effect was a significant increase in income and a decrease in spending. Consumer income growth year-over-year is now much higher than the spending growth year-over-year. For sustained growth of expenditures, income needs to grow at nearly the same rate. The savings growth rate was significantly revised upward. Seasonally and Inflation-Adjusted Year-over-Year Change of Personal Consumption Expenditures (blue line) to GDP (red line)
|
| June Case-Shiller Home Prices | n/a | The non-seasonally adjusted S And P CoreLogic Case-Shiller home price index (20 cities) year-over-year rate of home price growth slowed from 2.5 % to 2.4 %. The index authors stated, “Though home price gains seem generally sustainable for the time being, there are significant variations between YOY rates of change in individual cities”. S&P/Case-Shiller Home Price Indices Year-over-Year Change
|
| June Pending Home Sales | n/a | The National Association of Realtors (NAR) seasonally adjusted pending home sales index improved and now is in expansion. Our analysis shows the year-over-year rate of growth only marginally improved. The quote of the day from this NAR release:
For the unadjusted data, the 3-month rolling averages remain in negative territory and the year-over-year growth for June was also in negative territory. The data is very noisy and must be averaged to make sense of the situation. Shorter-term trends are now improving. Note that the long-term downward trend of home sales began in mid-2015.
|
| July ADP Employment | slowing of year-over-year growth | ADP reported non-farm private jobs growth at 156,000 which was at expectations. A quote from the ADP authors:
This month the rate of ADPs private employment year-over-year growth is below the tight range seen over this year. The rolling average of the year-over-year rate of growth declined for the last three months after being unchanged for the previous 8 months. Last month’s employment numbers were revised up.
|
| FOMC Meeting Announcement | how much stimulus is 1/4 point federal funds rate reduction? | The Federal Open Market Committee (FOMC) – the board of directors of the Federal Reserve lowered the range of the federal funds rate by a quarter-point as expected, and stated:
Overall the Fed appears to believe the economy has weakened since the last meeting. The FOMC also decided to stop reducing their holdings:
This statement will satisfy the markets which are looking for any reason to advance the market averages.
|
| June Construction Spending | indicates a slowing economy | The headlines say construction declined month-over-month. Our analysis shows the rolling averages declined – and this sector is now deeper in contraction. Also note that inflation is grabbing hold, and the inflation-adjusted numbers are deep in contraction.
|
| July BLS Employment | a lagging indicator | The establishment and household surveys somewhat correlated. This was a rather well-balanced jobs report. Jobs growth in 2019 is worse than any year since 2010. The trends clearly continue to show a slower growing employment picture. The economically intuitive sectors were positive.
|
| June Trade Data | slowing economy | Trade data headlines show the trade balance declined – and both exports and imports declined. The data in this series wobbles and the 3-month rolling averages are the best way to look at this series. The 3-month averages slowed for exports and imports.
|
| June Factory Orders | slow growth | US Census says manufacturing new orders improved month-over-month. Our analysis shows the rolling averages declined, and growth is in contraction year-over-year. According to the seasonally adjusted data, it was civilian aircraft which caused the improvement in the headline data. The data in this series is noisy so I would rely on the unadjusted 3 month rolling averages which declined.
|
| Surveys | worsening manufacturing surveys | Dallas Fed Manufacturing – This survey remains in positive territory year-over-year with subindices new orders increasing (and in expansion) and unfilled orders declining and now in contraction. This should be considered a worse report than last month.
Conference Board Consumer Confidence – The latest Conference Board Consumer Confidence Index’s headline number now stands at 135.7 (1985=100), up from 124.3 in June.
Chicago PMI – The Chicago Business Barometer eased further to 44.4 in July from 49.7 last month, the second sub-50 reading in 30 months. The Fed manufacturing surveys were little changed or decreased further this month – and Chicago ISM and two other Fed Survey were in contraction.
ISM and Markit Manufacturing Surveys – The ISM Manufacturing survey declined but continued in expansion. The key internals were mixed. The Markit PMI manufacturing Index remained barely in positive territory and insignificantly declined. Based on these surveys and the district Federal Reserve Surveys, one would expect the Fed’s Industrial Production index growth rate to be around the same level of growth as last month. Overall, surveys do not have a high correlation to the movement of industrial production (manufacturing) since the Great Recession. The ISM and Markit manufacturing surveys were similar this month.
Michigan Consumer Sentiment – The final University of Michigan Consumer Sentiment for July came in at 98.4, unchanged from the preliminary of 98.4, up from the June final of 98.2, and down from the May final of 100.0.
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| Counts | Definitely not positive news | Rail so far in 2019 has changed from a reflection of a strong economic engine to contraction. Currently, not only are the economic intuitive components of rail in contraction, but the year-to-date has slipped into contraction.
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Links To All Of Our Analysis This Past Week
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