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Economic data released in June suggest the U.S. economic recovery is losing steam. While manufacturing, the workhorse of the recovery, continues to expand, the pace of expansion has slowed significantly. Meanwhile, consumer spending remains soft and government spending is contracting, although business investment remains steady. Headline inflation is elevated, due in large part to energy and food prices, while core inflation levels remain relatively benign. The labor market has weakened further, despite the fact that the private sector has been increasing payrolls steadily. Initial jobless claims have remained above 400,000 for eleven consecutive weeks, suggesting a greater amount of employee churn rather than robust job growth.
The FOMC met on June 21st and 22nd and, as expected, left the overnight target rate unchanged and confirmed that it would end its QE2 program by June 30th, as scheduled. The Fed also substantially downgraded its projections for U.S. economic growth and employment. Currently the Fed is expecting the U.S. economy to expand by 2.9% in 2011, compared to its forecast of 3.3% in April and 3.9% in January. Its forecast for unemployment has increased to a range of 7.8%-8.2% by the end of 2012, compared to a previous projection of 7.6%-7.9%. Spending In the third and final reading of Q1 GDP, the government reported that the economy expanded at a 1.9% annualized pace, which matched economists’ estimates and was slightly above the second estimate of 1.8%. Consumer spending was unchanged at 2.2% from the second estimate, while business spending was bumped up to a 1.3% increase from a 1.2% increase and exports grew by 7.6% compared to 9.2% in the second estimate. Personal spending was unchanged in May, as continued increases in the price of fuel and groceries limited discretionary spending on other goods. Retail sales fell 0.2% in May – marking the first decline in eleven months – after a 0.3% increase in the previous month, while sales excluding autos, gasoline and building materials grew just 0.3%. Consumer credit expanded in April for the seventh straight month, rising by $6.25 billion due to an increase in non-revolving credit levels. The Conference Board’s index of consumer confidence fell to 58.5 in June – the lowest level in seven months – largely due to weakening conditions in the labor market, economic growth and higher inflation. Consumer sentiment, measured by the University of Michigan, fell in the preliminary June reading as consumer expectations were dampened by high fuel prices and slow job growth. Recent data from the manufacturing sector has shown the pace of growth has slowed, although it still remains in expansionary territory. The Chicago Purchasing Managers Index fell in May to 56.6 from April’s 67.6 reading and the Philadelphia Fed’s survey of manufacturing fell to -7.7, which was the first contraction of activity in nine months and was far off from economists’ expectations for a reading of 7.0. Industrial production expanded by a slight 0.1% in May, and factory output, which makes up about 75% of total industrial production, rose 0.4%, while automobile and part production fell 1.5%. Orders for durable goods rebounded in May, increasing by 1.9% after a 2.7% decline in April. The ISM Non-Manufacturing Index marked its 16th consecutive month of expansion in May despite remaining below the 6-month average. The Non-Manufacturing Index is said to capture nearly 90% of U.S. economic activity. The ISM Manufacturing Index dropped to 53.5 in May, the lowest level since September 2009, after coming in at 60.4 in April. Residential After a brief rebound in March, the housing market continued to weaken in May. Existing home sales dropped to the lowest level in six months in May and current inventory represents 9.3 months’ worth at the existing pace of sales. Of note, distressed properties accounted for 31% of sales and 30% of all sales were cash transactions. New home sales fell for the first time in three months, dropping 2.1% in May; sales fell in two of four regions, led by a 27% decrease in the Northeast. The median sales price of a new home decreased 3.4% on a year-over-year basis and the inventory of new homes for sale hit a new 44-year low. Applications for building permits, an indicator of future construction activity, jumped 8.7% to a 612,000 annualized pace in May, driven by applications to build multi-family units. Housing starts also increased to a seasonally adjusted annualized rate of 541,000, led by an 18% increase in the West. Labor The turnaround in the labor market continues to be excessively soft and the ranks of disenfranchised workers are growing. May non-farm payrolls grew by a mere 54,000 as the private sector created 83,000 jobs while the government trimmed 29,000 from the workforce. The unemployment rate climbed unexpectedly to 9.1% from 9.0%, thwarting expectations for a decline to 8.9%, and the underemployment rate, which includes people who have given up looking for work and those working part-time for economic reasons, remained stubbornly high at 15.8%, marking only a slight decline from the previous month’s 15.9%. First time claims for state jobless benefits rose the week ended June 23rd to 429,000 from 420,000 in the previous week, and the four-week average of initial claims, which reduces volatility inherent in the weekly number, held steady at 426,750. This marked the 11th straight week that claims have remained above 400,000. Inflation Headline inflation pressures continue to trend upward even as retail gas prices have dropped over the past month. The core personal consumption expenditures gauge, reportedly the Fed’s preferred inflation measure, grew 0.3% in May and the index is up 1.2% over the past 12 months. The overall producer price index grew by 0.2% in May, but for the past 12 months core PPI is up 7.3%. In May, the headline consumer price index rose by 0.2%, while the core rate rose by 0.3%. Compared to a year earlier, overall CPI is 3.6% higher and core CPI has increased 1.5%.
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