Deller's two cents: cash...cash...cash....With earnings reports coming out it appears that companies (including banks) are sitting on piles of cash. Rather than investing in expansion (i.e., making loans, investing in equipment, or hiring people) companies are in a "wait and see" mode and accumulating cash. The $1 million question is when will the "wait and see" mentality come to an end. When it does end, many companies have the cash to make major expansions. My one fear is that with all this cash will companies being looking to buy up weaker competitors rather than make new investments.
Economic Week in Review: GDP downshifts in 2nd quarter July 30, 2010
The Commerce Department's report on gross domestic product (GDP) for the second quarter confirmed what many had
expected: Although the economy has grown for the fourth straight quarter, the rate of growth has slowed. Moreover, the nation's recovery from recession has been tougher than previously thought, based on revised GDP figures indicating that the economy from 2007 to 2009 was weaker than originally estimated. For the week, the S&P 500 Index fell 0.1% to 1,102 (for a year-to-date total return-including price change plus dividends-of about -0.1%). The yield of the 10-year U.S. Treasury note fell 8 basis points to 2.94% (for a year-to-date decrease of 91 basis points).
GDP in the 2nd quarter grows more slowly
The second quarter's gross domestic product-the annualized value of all the goods and services produced during the spring-grew at a 2.4% annualized pace. "The GDP growth number came well within consensus estimates," said Vanguard economist Roger Aliaga-Díaz, "so in that sense there were no negative surprises." This was a marked slowdown from the first quarter's increase, which was revised to 3.7% from an initial estimate of 2.7%. Business investment was a strong contributor, surging 17% (annualized). By contrast, consumer spending, the largest component of U.S. economic activity, grew less than 2%. The major detractor from GDP was trade, as imports rose faster than exports.
The Great Recession was greater than thought
The government's annual revision of historical GDP data (see table below) revealed the Great Recession-from the fourth quarter of 2007 to, probably, the second quarter of 2009-was deeper than previously thought. "If anything, the downward revision means that the GDP numbers throughout the recession are more in line with the reality of near -10% unemployment rate over this period," said Mr. Aliaga-Díaz. "However, this revision has virtually no implications for our growth expectations for the next few quarters."
Real GDP (% change)
Period Originally reported Revised
2007 2.1% 1.9%
2008 0.4% 0.0%
2009 -2.4% -2.6%
The Great Recession
-3.8% -4.5%
Source: Commerce Department.
Consumer confidence fades for a 2nd month
The Conference Board's gauge of consumer confidence stood at 50.4 in July, a second monthly decline from May's two-year high of 62.7 (itself well below the pre-recession reading of around 90). Analysts attributed this glumness to concerns about unemployment, the outlook for incomes, and lackluster economic conditions. The Conference Board noted that such heightened anxiety will very likely create a "challenging"
back-to-school season for retailers. Even so, a rising number of consumers said they planned to buy autos and appliances.
Low mortgage rates don't prod new-home sales
New-home sales surged almost 24% in June from May, which was a dismal month following expiration of a federal homeowner tax credit that analysts now conclude lifted sales only slightly. In terms of actual new homes sold, June's annualized pace of 330,000 units was second only to May's record low of 300,000. Mortgage rates haven't spurred sales, either, although 30-year mortgage rates are at their lowest levels on record, averaging 4.54%. The supply of new homes available at the current pace of sales declined to 7.6 months of inventory in June compared with 9.6 months in May. The median national sales price of $213,400 was about the same as a year earlier.
Orders for durable goods unexpectedly decline
Durable goods orders declined 1% in June despite expectations that they'd increase by that amount. One explanation may be that many late-in-the-month aircraft orders hadn't made it into the report, deflating results. However, this was the second month in which orders declined, interrupting five prior months of increases. More important, "core" capital goods orders-which exclude defense and aircraft orders-showed a slower pace of growth in June, rising 0.6% compared with May's revised 4.6% increase. Some analysts nevertheless view the overall trend of growth in core capital goods orders as a potentially healthy underpinning for the economy.
Fed's regional survey finds modest growth
The Federal Reserve's latest Beige Book survey of economic conditions in its 12 districts found an economy growing in a patchwork sort of way. Most districts reported generally modest growth, but economic activity only held steady in the Cleveland and Kansas City regions and slowed in the Atlanta and Chicago areas. Generally, manufacturing continued to expand, retail sales rose modestly (with necessities favored over big-ticket items), residential real estate was weak and commercial real estate also struggled, overall bank-loan demand varied, and lending standards continued to be restrictive. The oil spill in the Gulf of Mexico had a mixed impact. The Atlanta District, for example, reported that some trip cancellations by leisure travelers were offset by bookings from oil cleanup crews, oil workers, and the National Guard.
Benefits drive compensation costs
Employers' cost to compensate workers rose 0.5% in the second quarter, a smaller increase than in the first quarter and 1.9% higher than a year earlier. For the second quarter in a row, benefits-especially health benefits-were largely responsible for the change. (Benefits account for about 30% of the index.) Wages and salaries continue to show weak growth.
The economic week ahead
Plenty of reports are on tap for next week. These include construction spending and the manufacturing index published by the Institute for Supply Management (ISM) on Monday, personal income and factory orders on Tuesday, the ISM's nonmanufacturing index on Wednesday, and job figures and consumer credit on Friday.
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Steven C. Deller
Professor and Community Development Economist Department of Agricultural and Applied Economics
515 Taylor Hall --- 427 Lorch Street
University of Wisconsin-Madison/Extension Madison, WI 53706
608-263-6251
"Conformity can be costly in a world of uncertainty"
Nobel winning economist Douglass North
Recently published: Targeting Regional Economic Development For more info: http://www.routledge.com/9780415775915
