Despite a lackluster finish to the month markets regained their lost ground in July, with the S&P hitting a record close mid-month before falling back slightly. For the month of July, the DOW gained 2.8% to close at 18,432, the NASDAQ gained 6.6% to close at 5,162 and the S&P, the index most closely followed by economists, rose 3.6% to close at 2,174.
CONSUMER CONFIDENCE STEADY
The New-York based Conference Board’s Consumer Confidence Index was virtually unchanged in July at 97.3 after rising to a downwardly revised 97.4 in June. The Present Situation Index increased to 118.3 from a downwardly revised 116.6. The Expectations Index edged down to 83.3 after rising to an upwardly revised 84.6 in June. The Conference Board said that consumers were slightly more positive about current business and labor market conditions, suggesting that the economy will continue to expand at a moderate pace. Economists say a level of 90 indicates that the economy is on solid footing and a level of 100 or more indicates growth. Analysts caution that the real driver behind consumer spending is income growth and that labor market trends are a more accurate predictor of consumer behavior.
CONSUMER SPENDING RISES 0.4%
Consumer spending grew 0.4% in June after rising 0.4% in May and 1.1% in April. Personal income, including wages and salaries, went up a moderate 0.2% in June. Income has been rising slowly but steadily over the year. The personal saving rate fell to 5.3% from 5.5% in May, a sign that consumers are becoming less cautious. The personal-consumption expenditures price index, (PCE) the inflation measure preferred by the Federal Reserve, climbed 0.1%, as expected. The index rose 0.9% the past year, but is still well below the Fed's 2% target. The price index excluding the volatile categories of food and energy increased 0.1%, and was up 1.6% from a year ago. Strong consumer spending should give businesses confidence to expand, according to analysts. Consumer spending is closely watched by economists because it accounts for 70% of U.S. economic activity.
CONSUMER PRICES RISE 0.2%
The Consumer Price Index (CPI) rose 0.2% in June after rising 0.2% in May, making for four consecutive months of increases. In the 12 months through June the CPI increased 1.0%. Core prices, which strip out volatile food and energy costs, rose 0.2% in June after rising by the same amount in May. In the 12 months through June core inflation was up 2.3%, the seventh consecutive month of growth of 2.0% or more. The overall increase was less than expected, and primarily driven by a 1.3% increase in energy prices.
UNEMPLOYMENT RATE STEADY AT 4.9%
The unemployment rate held steady in July at 4.9% and the economy added 255,000 new jobs. Job gains for June and May were revised upwards by a total of 18,000 jobs. So far in 2016, the economy has added an average of 186,000 jobs a month, down from 229,000 a month in 2015. Job gains in July were broad-based, with only the sectors that serve the oil and gas industry shrinking. Average hourly earnings for private-sector workers rose by 8 cents, or 0.3% from June to July to $25.69, the strongest showing in seven years. The labor participation rate went up slightly, a sign that more are entering the job force.
DURABLE GOODS ORDERS FALL 4.0%
New orders for durable goods fell 4.0% in June after falling a downwardly revised 2.8% in May. It was the largest decline since August 2014. The drop was led by a 58.8% decline in civilian aircraft orders, a typically volatile category. Orders for non-defense capital goods excluding aircraft, a category that serves as a proxy for business investment spending, rose 0.2% in June after falling 0.7% in May. Shipments of core capital goods, which factor into GDP calculations for business spending, fell 1.3% in June after rising 1.2% in May. Economists noted that the report shows that overseas unrest is affecting U.S. manufacturers. The durable goods report is often both volatile and subject to sharp revisions.
CHICAGO PMI SLIPS TO 55.8
The Chicago PMI slipped to 55.8 in July after jumping to 56.8 in June. It was the second highest reading for 2016 and above the consensus forecast of 54.4. It was also the first month since January 2015 that all five components of the PMI were above 50, the level which indicates confidence in the manufacturing sector. New Orders fell slightly to 59.3 from 63.2 in June, still close to the highest level in 18 months. Employment rose above 50, but overall inflationary pressures remained subdued, with prices paid falling slightly for the third consecutive month.
WHOLESALES PRICES RISE 0.5%
The Producer Price Index (PPI) rose 0.5% in June after rising 0.4% in May and was up 0.3% from June 2015. The core PPI, which excludes food, energy and trade services, rose 0.3% in June after edging down 0.1% in May and was up 0.9% in the 12 months through June. The increase in the PPI was greater than economists had expected. Energy goods and trade services once again accounted for much of the increase. The PPI for inputs to construction rose 0.1% in June after rising 0.5% in May but was down 2.8% from June 2015.
Q2 GDP GROWS 1.2%
GDP grew 1.2% in the second quarter, up slightly from a downwardly revised 0.8% growth in the first quarter and well below the robust 2.6% growth expected by economists. Stronger consumer spending was offset by weakness in housing construction and a big slowdown in inventory restocking. Consumer spending, which accounts for 70% of economic activity, grew 4.2% in the second quarter, more than twice the 1.6% rate in the first quarter. But businesses cut inventories by 1.7% as they tried to get inventory in line with sales. Business nonresidential investment fell for the third consecutive quarter as the struggling energy sector caused sharp cutbacks in oil exploration and related activities. Housing construction, which has been a constant positive for the economy, shrank at an annual rate of 6.1% in the second quarter, with both single-family and multifamily showing weakness. Analysts are expecting the economy to grow at slightly better than a 2% pace for the second half of the year, which would produce an anemic annual GDP growth below 2%. In addition, the annual revision to 2015 GDP showed that growth for 2015 was 2.6%, up from the 2.4% previously reported.
JOB OPENINGS FALL IN MAY
There were 5.5 million job openings in May, down from 5.79 million job openings in April, according to the May Job Openings and Labor Turnover Summary (JOLTS) report. May's results marked the fewest job postings since December. The decline in jobs advertised by employers was focused mainly in the private sector, especially in the South and Midwest regions of the U.S. Hires were little changed across the country at 5 million in May. Also little changed were the 5 million separations, with 2.9 million quits and 1.7 million layoffs. Quits are typically voluntary separations, and an increase in quits generally indicates that people are more confident about their ability to find another job. The May jobs report mirrored the terrible month in the markets and general economic unrest; the economy and the job picture have improved significantly since then. The JOLTS report is one of Fed Chair Janet Yellen’s preferred economic indicators.
FED LEAVES INTEREST RATES UNCHANGED
The Federal Reserve left interest rates unchanged at 0.25% to 0.5% at the July meeting of the Open Market Committee. The Fed said that risks to the U.S. economy have subsided and the labor market is strengthening. They also noted household spending is growing strongly, but business investment has been soft. Some economists believe the first increase in rates since last December could come in September, but most think it is more likely the Fed will wait until December. The statements accompanying the decision were characterized as "upbeat but guarded." The committee repeated previous statements that interest rate increases would be gradual and it expects inflation to eventually reach its target of 2%.
BREXIT IMPACT ON U.S. ECONOMY
Brexit may have little impact on the U.S. economy this year, but next year could be a different matter, according to an analysis by Markit Ltd. After the initial overreaction to Britain’s surprise decision to exit the European union, U.S. markets first recovered and then kicked into high gear. The new report from the London-based market analytics firm with major operations in Colorado says that Brexit will have little impact on U.S. GDP this year, but is likely to reduce GDP by 0.2% next year because of weaker exports and a stronger U.S. dollar. Worldwide, the Brexit vote is projected to reduce GDP 0.1% this year and 0.4% next year.
IMF DOWNGRADES ECONOMIC FORECAST
The International Monetary Fund cut its global economic growth projections by one-tenth of a percentage point to 3.1% this year and 3.4% next year to reflect the likely consequences of Great Britain’s exit from the European Union. Before the Brexit vote, the agency had expected to raise its quarterly growth forecast.
DIGITAL PRICE INDEX
Adobe reported that its fifth monthly Digital Price Index (DPI) shows continued deflation in the vast majority of the goods and services the DPI tracks, with essentials such as groceries showing firmer prices than discretionary purchases such as electronics and sporting goods. Much of the deflation in June was driven by falling prices for tablets, televisions and appliances, with the category showing 3.5% deflation. The prices for electronics have dropped 10.5% year-over-year. Adobe reports that the DPI tracks $7.50 out of every $10 spent online with the top 500 U.S. retailers.
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