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The US economy continues to expand, albeit at a slower pace, as the government’s incentive programs are slowly pared back and the Euro-zone debt crisis has put investors on edge. At the beginning of June, the Euro-zone took steps that they hoped would shore up the finances of their member countries. On June 7th, the €440 billion European Financial Stability Fund (EFSF) was approved by Euro-zone finance ministers and is part of the larger €750 billion rescue package, which includes an IMF loan.
Even with this aid package, the Chairman of the US Federal Reserve, Ben Bernanke, has expressed concern that Europe’s debt problems could have a larger effect on our economic growth. The statement released from the two-day FOMC meeting on June 22nd and 23rd recognized that “developments abroad” are having a negative effect on economic growth in the U.S. as the Fed left the target rate unchanged and kept the language expressing “exceptionally low levels of the federal funds rate for an extended period”. Residential Housing As expected, the residential housing market took a step backwards after the government incentive program expired on April 30th. May housing starts experienced the largest decline since March 2009, falling 10.0% and building permits, an indicator of future construction activity, dropped 5.9%. New home sales plummeted 33.0% last month to a record low and the median home price declined 9.6% year-over-year. Existing home sales declined 2.2% in May while the median home price jumped 2.7% from a year ago. The S&P/Case-Shiller 20-city home price index showed that prices rose 0.8% in April, which is the first increase in seven months, while the index gained 3.8% from last year. Spending In its third estimate of Q1 GDP, the government reported that the economy expanded at a 2.7% annualized pace, slightly below expectations of 3.0% and also below the 5.6% pace set in the fourth quarter. The growth was bolstered by a 3.0% increase in consumer spending, which was revised down from the 3.6% that was reported in the previous reading. The Conference Board’s consumer confidence reading dropped in June, falling to 52.9 from 62.7 in May. The gauge of expectations for the next six months decreased to the lowest level in three months. In contrast, the University of Michigan’s final June gauge of consumer sentiment rose to 76.0 from a preliminary reading of 75.5 and May’s final reading of 73.6. U.S. retail sales dropped 1.2% in May, marking the first decline since September 2009. Consumer credit climbed by $2.4 billion in April, although revolving debt, such as credit card debt, contracted for the nineteenth consecutive month as consumers may be concerned about the sustainability of the economic recovery. On the business side, business spending and the manufacturing sector continue to lead the economic recovery. The ISM Manufacturing index remained in expansion territory in May as it grew at a faster than expected 59.7, although slightly below April’s reading of 60.4. During the same period, the Chicago Purchasing Managers Index remained in expansion mode for the 8th straight month, but fell to 59.7 from a 5-year high of 63.8 in April. Orders for durable goods sank by 1.1% in May, due to a 30% decrease in aircraft orders. Excluding transportation, orders rose 0.9% following a 0.8% decline in the previous month. Orders for non-defense capital goods excluding aircraft, a proxy for future business investment, grew 2.1% in May after dropping 2.7% in April. Finally, the U.S. trade deficit widened by $40.3 billion in April, as imports fell 0.4% and exports decreased 0.7%. Labor Market Although the May Employment Report revealed payroll growth and the unemployment rate declined, much of this can be attributed to census hiring. The unemployment rate fell to 9.7% as many Americans gave up on their job search and non-farm payrolls increased by 431,000 compared to expectations of 536,000. Initial jobless claims, a leading indicator of the labor market, fell by 19,000 to 457,000 for the week ending June 19th, but have been range bound between 440,000 and 480,000 for the past few months. The four-week moving average of initial claims also dropped to 462,750. Inflation Overall price pressures remain well contained once again, giving the Federal Reserve plenty of room to fine tune monetary policy at its own pace. The consumer price index fell by 0.2% for a second straight month in May, while core prices, which exclude volatile food and energy prices, were 0.1% higher. In the same period, the producer price index decreased 0.3% while core prices rose 0.2%. Compared to a year earlier, core consumer prices are up 0.9% while core wholesale prices have risen 1.3%. The next FOMC meeting is scheduled for August 10th and in light of market volatility stemming from the Euro-zone debt crisis, moderate economic improvements and subdued inflation readings, market participants currently expect the FOMC to leave the overnight lending rate unchanged until July of 2011.
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