All three indexes remained in the black in July and posted their fourth consecutive monthly gain as the big tech companies posted stellar results. However, analysts note that there is much uncertainty ahead, as unemployment benefits expired on July 31 and CV19 resurged in much of the country.
Consumer Spending Rises 5.6%
Consumer spending rose 5.6% in June after jumping a record 8.2% in May. Core consumer spending rose 5.2%. In June, consumer spending was boosted by a 6.4% increase in the purchases of goods and a 5.2% increase in purchases of services. Personal income dropped 1.1% in June after dropping 4.4% in May and is likely to fall further. Consumer spending accounts for 70% of US economic activity.
Consumer Prices Rise 0.6%
The Consumer Price Index (CPI) rose 0.6% in June after three consecutive monthly declines. Prices were up 0.6% from June 2019. Excluding the volatile food and energy components, core prices rose 0.2% in June and were up 1.2% year over year. Much of the increase in prices was due to a modest rebound in oil prices. In addition, some of the categories that had been responsible for the largest declines in prices began to reverse in June, with apparel prices rising and transportation services prices rebounding, suggesting the demand for travel was beginning to rebound. The personal consumption expenditures (PCE) price index excluding the volatile food and energy components rose 0.2%, matching May’s gain. In the 12 months through June, core PCE prices rose 0.9% after being up 1.0% in May. The core PCE index is the preferred inflation measure for the Federal Reserve, which has a target of 2% for inflation.
Consumer Confidence Falls to 92.6
Unemployment Drops to 10.2%
Job Openings Rise in May
Job openings increased to 5.4 million on the last business day of May and the number of hires increased by 2.4 million to a series high of 6.5 million, according to the latest Job Openings and Labor Turnover Survey (JOLTS) from the US Bureau of Labor Statistics (BLS). It was the largest monthly increase of hires since the series began, and the first time job openings had increased since January. Total separations dropped by 5.8 million to 4.1 million, the single largest decrease since the series began. Within separations, the quits rate rose to 1.6% while the layoffs and discharges rate fell to 1.4%. These improvements in the labor market reflected the easing of restriction and resumption of business in the new-normal in much of the country in May. The BLS warned that the pandemic is affecting their ability to collect reliable data and response rates have dropped since the pandemic began. JOLTS is a lagging indicator, but is closely watched by the Federal Reserve and factors into decisions about interest rates and other measures.
Chicago PMI Rises to 51.9
The Chicago Purchasing Managers Index (Chicago PMI) rose to 51.9 in July after inching up to 36.6 in June, the first time in 12 months the index has been above 50. Among the five indicators, Production and New Orders saw the largest monthly gains. New Orders jumped 23.8 points to the highest level since August 2019. Production rose 49.5%, putting the index back into expansion. While some companies noted recovering orders, others reported continued difficulties due to CV19. Order Backlogs grew 15.3 points in July, marking a near one-year high, but the index remained in contraction, where it’s been since September 2019. Inventories gained 6.9 points in July after falling sharply in the previous month. Respondents were asked if they had contingency plans in place for a second wave of CV19. The majority (51.3%) have planned ahead, while 30.2% have no contingency plans in place. When asked about their business forecast for the remainder of the year, 65% of respondents expect growth to be below 5% this year. Looking all the way back to when the series began in 1967, the PMI has ranged from 20.7 in June 1980 to 81.0 in November 1973.
Wholesale Prices Fall 0.2%
The Producer Price Index (PPI) fell 0.2% in June after rising 0.4% in May. In the 12 months through May the PPI has fallen 0.8%. Excluding the volatile food, energy and trade services components, producer prices rose 0.3% in June. That was the biggest gain in the core PPI since January and followed a 0.1% rise in May. In the 12 months through June, the core PPI edged down 0.1%. In June, rising costs for energy goods were offset by weakness in services, pointing to subdued inflation that should allow the Federal Reserve to keep pumping money into the economy to arrest a downward spiral. The decrease in wholesale prices took economists by surprise, as the general consensus was for wholesale prices to rise 0.4%. Nevertheless, economists say that deflation remains unlikely as underlying producer inflation actually ticked up in June.
Q2 GDP Plunges 32.9%
Q2 GDP plummeted 32.9%, the steepest decline in GDP since the government started keeping records in 1947. However, the drop in GDP was actually slightly below consensus of a 35% decline. Consumer spending dropped 34.6% and real Personal Consumption Expenditures (PCE) plunged 35%, all historic numbers. The economy contracted 5% during the first quarter. Analysts believe the economy will bounce back in the third quarter, but how quickly is very hard to project now that CV19 is resurging in much of the country. Wells Fargo estimates that GDP will grow at an annualized rate of 18% in Q3, assuming that there is not another full lockdown of the economy. Analysts are also concerned that weekly jobless claims are rising again for the first time since March.
Stimulus Program Talks Stall
Negotiations on Capital Hill to extend supplemental unemployment benefits and provide another round of stimulus programs ground to a halt after Democrats and Republicans failed to reach a bipartisan agreement. Democrats are pushing a relief package of more than $3 trillion while Republicans are trying to keep the price tag closer to $1 trillion. Republicans in Congress are hopelessly deadlocked. President Trump issued a series of executive orders that extend federal unemployment payments, but reduced the amount and require states to share the costs; reinstitute a recommended federal moratorium on evictions; extend the suspension of student loan payments; and temporarily defer collection of the portion of Federal payroll taxes paid by individuals. However, many legal experts say that the orders are neither legal nor feasible to execute. Analysts speculate that the real purpose of the orders was to force Congress to reach a negotiated legislative solution.
Fed Holds Rates Near Zero
The Federal Reserve held rates near zero (0% - 0.25%) at its regular meeting in July and pledged to hold rates at this historic low level through 2022. Fed Chairman Jerome Powell also noted that while the Fed has already taken many actions to prop up the economy, there may be more they can do in the future.
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