NAM: Monday Economic Report
In a long-anticipated speech, Federal Reserve Chair Jerome Powell said that monetary policymakers would be willing to accept core inflation above the Federal Open Market Committee’s stated goal of 2%, so long as the longer-term average achieved that goal. The FOMC affirmed the more “dovish” change in strategy in a statement made afterward. With core inflation well below that goal right now, the test of this new policy will have to come later.
Therefore, as part of its dual mandate to have stable prices and to encourage full employment, the FOMC is more willing to let inflation run “hotter” than it might have in the past to promote faster economic growth. In addition, it means that the Federal Reserve is likely to have easier monetary policy for the foreseeable future—something that it had already acknowledged.
The personal consumption expenditures deflator increased 0.3% in July, but it has risen just 1% year-over-year, and core inflation, which excludes food and energy costs, has increased 1.3% over the past 12 months.
New orders for durable goods jumped 11.2% in July, extending the 15.0% and 7.7% gains in May and June, respectively, with the sector rebounding from steep declines due to the COVID-19 pandemic. Despite the improvement, new orders for durable goods have dropped 5.0% year-over-year, or with transportation equipment excluded, sales have fallen 1.0% since July 2019.
Similarly, manufacturers in the Kansas City and Richmond Federal Reserve Bank districts reported stronger growth in August, with cautious optimism in their outlook for the next six months.
New single-family home sales soared 13.9% from 791,000 units in June to 901,000 units in July, the best reading since December 2006. Historically low mortgage rates have helped buoy the market. Over the past 12 months, new single-family home sales have jumped 36.3%, up from 661,000 units in July 2019 and with robust gains across the country.
Personal spending rose 1.9% in July, increasing for the third straight month. At the same time, personal consumption expenditures have fallen 2.8% since July 2019, down from a decline of 16.3% year-over-year in April. Consumers spent 7% less on services in July than one year earlier, but encouragingly, durable and nondurable goods spending rose 12.6% and 3.3% year-over-year, respectively.
The saving rate, which had soared to an all-time high of 33.7% in April, declined for the third consecutive month to 17.8% in July. However, that remains highly elevated, well above the 7.5% average in 2019, suggesting that consumers remain cautious in their spending despite progress in the economy since the depths of the pandemic.
Meanwhile, personal income edged up 0.4% in July, rising for the first time since April. These data have been heavily influenced by transfer payments over the past few months. Unemployment insurance has soared from $27.8 billion in February to $1.47 trillion in June, pulling back to $1.36 trillion in July. In addition, government assistance checks were largely responsible for the 12.2% increase in personal income in April. Overall, personal income has risen 8.2% since July 2019.
In July, wages and salaries and proprietors’ income both increased 1.4%. However, these figures fell 1.1% and 2.3% year-over-year, respectively. Manufacturing wages and salaries rose from $848.9 billion in June to $868.9 billion in July, down 3.9% from $904.6 billion one year earlier.
Consumer confidence measures provided mixed results last week. The University of Michigan and Thomson Reuters reported that Americans felt more upbeat in their outlook, but the Conference Board’s index declined to the lowest level since May 2014 on lingering worries about COVID-19 and household finances. Both reflected sentiment that was well below prepandemic levels.
The U.S. economy contracted by 31.7% at the annual rate in the second quarter, the largest decline in the history of the series, which dates to 1947. Moving forward, real GDP should rise by at least 18% in the third quarter as economic activity resumes, albeit with lingering reluctance for many participants, at least until there is more certainty regarding the virus and its spread. The outlook is for economic growth to shrink 4.1% in 2020, expanding 3.5% in 2021.