Deller's two cents: economy growing very slowly, but till the debt drama is resolved all bets are off. Even if the debt limit is not lifted we will not default: the US Treasury will make interest payments and make good on notes and T-bills that are maturing. But that means some "bills" will not be paid, but who? Department of Defense contractors? Payments to state governments? Payments to farmers? But the bigger question is "if Washington DC is this dysfunctional what does that mean about the ability to deal with other important economic issues?"
Economic Week in Review: Debt drama continues, new data disappoint
July 29, 2011
With the federal debt ceiling debate serving as a shadowy backdrop, the latest economic reports continued to paint a picture of an economy struggling to sustain a recovery. The first estimate of second-quarter gross domestic product was lower than hoped, but the figure for the previous quarter was revised downward so much that the latest number represented an uptick. The Federal Reserve's latest survey confirmed a slowing economy, while new-home sales and durable-goods orders also retreated a bit. For the week ended July 29, the S&P 500 Index fell 3.9% to 1,292 (for a year-to-date total return-including price change plus dividends-of about 3.9%). The yield on the 10-year U.S. Treasury note fell 17 basis points to 2.82% (for a year-to-date decrease of 48 basis points).
Top questions on the federal debt debate
The ongoing debate over the federal debt ceiling has prompted many questions from investors. Vanguard has published our view on the situation.
GDP data surprise to the downside
U.S. economic activity grew more slowly than expected in the second quarter, at an annual rate of 1.3%, based on the first estimate of gross domestic product (GDP). But that sluggish figure actually represented a pickup from the first quarter because annualized GDP for the first three months of the year was revised dramatically downward, from 1.9% to 0.4%. (All figures are adjusted for inflation.)
Behind the disappointing headline numbers, however, some data indicated that growth may be poised to pick up later this year. Consumer spending, the biggest GDP component, was soft (+0.1%) but was dragged down mainly by sales of motor vehicles and parts (-0.7%), which were affected by short-term supply disruptions following Japan's March 11 disaster. Those problems are expected to ease. Meanwhile, fixed nonresidential investment (including structures, equipment, and software) showed strength, rising an annualized 6.3% and making up about half of GDP's net growth. And homebuilding also contributed to growth in the second quarter, after subtracting from it in the first. The trade deficit shrank, as exports, helped by a weaker U.S. dollar, grew much more strongly than imports. Government spending was a hindrance, falling at a 1.1% annualized rate, as a slight gain in federal spending was more than offset by state and local cutbacks.
Fed says economy is growing more slowly
The economy's growth slowed a bit in June and early July, according to the Federal Reserve's latest Beige Book survey of nationwide conditions. Reports from all of the Fed's 12 districts showed that economic activity moderated, particularly in the 6 districts in the eastern United States. However, consumer spending was higher in virtually every district, as consumers were helped by falling gasoline prices, although auto sales slowed a bit as inventories remain affected by Japanese supply-chain disruptions. The Fed's report noted that "the summer tourism season has started off stronger than last year in most areas unaffected by severe weather." Also, most districts reported slightly improved labor market conditions. Real estate activity remained weak, "although construction and activity in the residential rental market continued to improve since the previous Beige Book."
Sales of new homes disappoint
Sales of new homes fell 1.0% in June to an annualized pace of 312,000 units. Sales dropped sharply in the Northeast (-16%) and the West (-13%), but rose in the Midwest (+10%) and South (+3%). The data confirm that the housing market continues to bounce along a bottom. On a brighter note, the number of available new homes declined to a record low of 164,000-representing a 6.3-month supply-as builders have slimmed down their inventories to very lean levels. Also, the median price of new homes rose 6% to $235,200, but that measure has been more volatile lately because of the lower number of sales.
Confidence indicator ticks upward
The Conference Board's index of consumer confidence bounced off its lowest level since late last year and ticked up to 59.5 in July. The index had fallen to 57.6 in June (revised downward from 58.5). The rise was the first since April, when the index stood at 66.0, and still well below the recent peak of 72.0 in February.
"Consumer confidence posted a modest gain in July, the result of an improvement in consumers' short-term outlook," said Lynn Franco, director of the Conference Board Consumer Research Center. "Consumers' appraisal of current business and employment conditions, however, was less favorable as concerns about the labor market continue to weigh on consumers' attitudes. Overall, consumers remain apprehensive about the future, but some of the concern expressed last month has abated."
Durable-goods data continue to see-saw
New orders for U.S. durable goods--those expected to last at least 3 years--dropped 2.1% in June, more than offsetting May's increase of 1.9%. The latest dip continued a 12-month trend with this indicator-rising one month, then falling the next. Transportation goods-including aircraft and autos-accounted for most of the decrease, reflecting some lingering effects of supply-chain problems in the wake of the Japanese tsunami. Excluding that category, orders were up slightly (0.1%). Orders of core capital goods--which exclude aircraft and defense orders--retreated 0.4%, but shipments rose 1.0%.
Compensation costs for employers rise
Employment costs climbed 0.7% in the second quarter, led by a 1.3% boost in benefits. Growth in wages and salaries remained steady at 0.4%. Compared with a year ago, total compensation has increased 2.2%, wages and salaries 1.6%, and benefits 3.6%. Wages grew faster in the second quarter for employees in the private sector compared with those in state and local governments, which continue to face budget constraints. Overall, compensation is growing slowly, which many analysts expect will continue to restrain consumers from ramping up their spending anytime soon.
The economic week ahead
Next week brings a slew of reports, including construction spending and the ISM Manufacturing Index on Monday, personal income on Tuesday, factory orders and the ISM Non-Manufacturing Index on Wednesday, and consumer credit and the Labor Department's closely watched update on the employment situation on Friday. Meanwhile, the federal debt debate could continue into next week.
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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
"I started out with nothing and I still have most of it left."
Seasick Steve
