The last, unofficial week of summer was a good week for the stock market. That's saying something, too, considering North Korea ratcheted up geopolitical angst with a test launch of a missile that flew over northern Japan and Hurricane Harvey cut an historic flood-based path through southeast Texas that shut down Houston, the nation's fourth most populous city and home to a host of oil refineries and one of the nation's busiest ports.
The good in the bad was that it sparked a belief (or a hope really) that Congress will agree to a budget resolution and a debt limit increase without any partisan political drama, thereby avoiding a government shutdown and ensuring all of the nation's obligations will be met without interruption.
It wasn't just that, though.
The week also produced a host of mostly encouraging economic data that boosted investor sentiment -- even the employment report for August, which fell short of expectations on a number of fronts.
Below we have aggregated our review of the key economic reports this past week for some light, Labor Day weekend reading.
The Conference Board's Consumer Confidence Index increased to 122.9 in August (Briefing.com consensus 120.3), up from a downwardly revised 120.0 (from 121.1) in July.
The key takeaway from the report is that consumer confidence remained high as the current labor market assessment overshadowed a lot of the political drama that has called into question the ability to implement a tax reform plan this year.
- The bulk of the improvement in August was tied to the Present Situation Index, which increased from 145.4 to 151.2.
- The Expectations Index increased from 103.0 to 104.0.
- The percentage of respondents stating jobs are plentiful increased from 33.2% to 35.4%, while those claiming jobs are hard to get decreased from 18.7% to 17.3%
Q2 GDP - Second Estimate
The second estimate for second quarter GDP will feed a good economic narrative. It showed real GDP increased at an annual rate of 3.0% in the second quarter (Briefing.com consensus 2.7%) versus the advance estimate of 2.6%. The GDP Price Deflator was left unchanged at 1.0%, as expected.
The key takeaway from the report is that it was driven by a pickup in both consumer and business spending, which is typically a good mix for accelerating economic growth.
- The upward revision stemmed from upward revisions to personal consumption expenditures (from 2.8% to 3.3%) and gross private domestic investment (from 2.0% to 3.6%), which was led by nonresidential fixed investment (from 5.2% to 6.9%). Government spending was revised down (from 0.7% to -0.3%).
- There was basically no change in private inventories, so real final sales of domestic product checked in at 3.0%, which was the highest rate since the second quarter of 2015.
- The overall GDP growth rate was the first with a 3-handle on it since the first quarter of 2015.
Personal Income and Spending
Personal income increased 0.4% in July (Briefing.com consensus 0.3%), led by a nice 0.5% increase in wages and salaries, while personal spending increased 0.3% (Briefing.com consensus 0.4%) on the heels of an upwardly revised 0.2% increase (from 0.1%) for June. The personal savings rate dipped from 3.6% to 3.5%.
The key takeaway from the report, however, was that inflation pressures remained subdued, which suggests to market participants that expectations for another rate hike this year can also remain subdued.
- The PCE Price Index and core PCE Index, which excludes food and energy, were both up 0.1% in July. Those increases left the PCE Price Index up 1.4% year-over-year, unchanged from the 12-months ending in June, and the core PCE Price Index up 1.4%, down from 1.5% in June.
- PCE price inflation remains well below the Fed's longer run target of 2.0%, yet it is the dip in the core inflation rate that stands out today because that can't be blamed on volatile energy prices.
- Real personal consumption expenditures increased 0.2%, which will be a positive input for Q3 GDP forecasts, and rose 2.7% year-over-year versus 2.6% in June
- Real disposable personal income increased 0.2% and is up 1.3% year-over-year versus 1.2% in June
- Spending on goods was up 0.6% in July while spending on services jumped 0.2%
Initial Jobless Claims
Initial claims for the week ending August 26 increased by 1,000 to 236,000, as expected, and continuing claims for the week ending August 19 decreased by 12,000 to 1.942 million.
This report marks the 130th straight week that initial claims have been below 300,000, which is reflective of an environment in which employers are reluctant to let go of their workers.
- There were no special factors influencing the initial claims reading
- The four-week moving average for initial claims decreased by 1,250 to 236,750
- The four-week moving average for continuing claims decreased by 6,250 to 1,951,500
ISM Manufacturing PMI
The ISM Manufacturing PMI checked in at 58.8 for August (Briefing.com consensus 56.8), up from 56.3 in July. The August reading is not only the highest level in 2017, it is also the highest reading since April 2011 and marks the 12th consecutive month the index has been above 50, which is the dividing line between expansion and contraction.
The key takeaway from the survey is that it connotes a manufacturing sector running with a full head of steam, although that interpretation conflicts somewhat with the drop in the manufacturing workweek reported in the Employment Situation report for August.
- The New Orders Index dipped slightly from 60.4 to 60.3
- The Production Index increased from 60.6 to 61.0
- The Employment Index jumped from 55.2 to 59.9
- The Prices Index was unchanged at 62.0
- According to the ISM, the PMI for August, if annualized, corresponds to a 4.9% increase in real GDP annually based on the past relationship between the index and the overall economy.
Total construction spending declined 0.6% month-over-month in July (Briefing.com consensus +0.5%) after a downwardly revised 1.4% decline (from 1.3%) for June.
The key takeaway from the report is that the decline in construction spending will act as a drag on Q3 GDP forecasts.
- The July decline was driven by a 1.4% decrease in total public construction spending and a 0.4% decrease in total private construction spending.
- On the public side, nonresidential spending dropped 1.4%, with almost every component category seeing a decline in spending. The lone exceptions were Power (+11.6%), Public Safety (+5.8%), and Highway and Street spending (+0.1%).
- On the private side, residential spending increased 0.8% with new single-family spending increasing by a like amount to offset a 0.8% decline in nonresidential spending, which was fueled by declines in all component categories.
- Total residential construction spending increased 0.8% in July while total nonresidential spending fell 1.7%.
- On a year-over-year basis, total construction spending is up just 1.8%, with public construction spending down 5.6% and private construction spending up 4.1%
The final August reading for the University of Michigan Consumer Sentiment report was 96.8 (Briefing.com consensus 97.1). That was below the preliminary reading of 97.6, but up from the final reading of 93.4 for July.
The key takeaway from the report is that consumer sentiment remains at high levels despite the (geo)political drama as consumers reportedly have maintained a favorable assessment of their own financial situations.
- The Current Economic Conditions Index dipped to 110.9 from the preliminary reading of 111.0. The final reading for July was 113.4.
- The Index of Consumer Expectations fell to 87.7 from the preliminary reading of 89.0. The final reading for July was 80.5.
The Employment Situation report for August fell short of expectations on a number of fronts, with average hourly earnings growth being the most prominent shortfall.
The key takeaway from the report is that wage inflation is still not picking up despite the low unemployment rate. That will keep the Goldilocks narrative in place, which has served as a perfectly-cooked bowl of porridge for a stock market that has feasted on a backdrop of modest growth and low inflation.
The notable headlines from the Employment Situation Report are as follows:
- August nonfarm payrolls increased by 156,000 (Briefing.com consensus 183,000). Over the past three months, job gains have averaged 185,000 per month.
- July nonfarm payrolls revised to 189,000 from 209,000
- June nonfarm payrolls revised to 210,000 from 231,000
- August private sector payrolls increased by 165,000 (Briefing.com consensus 173,000).
- July private sector payrolls revised to 202,000 from 205,000
- June private sector payrolls revised to 207,000 from 194,000
- August unemployment rate was 4.4% (Briefing.com consensus 4.3%) versus 4.3% in July
- Persons unemployed for 27 weeks or more accounted for 24.7% of the unemployed versus 25.9% in July
- The U6 unemployment rate, which accounts for both unemployed and underemployed workers, held steady at 8.6%
- August average hourly earnings increased 0.1% (Briefing.com consensus 0.2%) after increasing an unrevised 0.3% in July
- Over the last 12 months, average hourly earnings have risen 2.5%, unchanged from the 12-month period ending in July
- The average workweek in August was 34.4 hours (Briefing.com consensus 34.5), versus 34.5 hours in July
- August manufacturing workweek declined 0.2 hours to 40.7 hours
- Factory overtime was unchanged at 3.3 hours
- The labor force participation rate held steady at 62.9% in August