AUGUST 6, 2010
Economic Growth Slowed During Q2
U.S. economic growth slowed during Q2 due to a rising trade deficit and an easing in consumer spending. According to initial estimates, gross domestic product (GDP) expanded at a 2.4-percent annualized rate during Q2, a marked slowdown from Q1’s upwardly revised 3.7-percent pace. The data indicate the economy continues to expand, albeit at a slower pace relative to recent quarters.
Consumer spending, which accounts for approximately 70 percent of the economy, rose at a 1.6-percent pace in Q2, compared with a 1.9-percent rate in Q1. The relatively subdued pace of consumption indicates that weakness in the labor markets and tight credit conditions are continuing to restrain consumer spending. The core personal consumption expenditure (PCE) price index, the Federal Reserve’s preferred measure of inflation, rose at an anualized rate of just 1.1 percent during Q2, down slightly from 1.2 percent in Q1.
The U.S. economy has now expanded for four straight quarters, resulting in a 12-month growth rate of 3.2 percent—the largest year-over-year increase since Q1 2005. But annual revisions to GDP revealed a much deeper recession than previously thought, with the economy shrinking 4.1 percent from Q4 2007 to Q1 2009; this compares with an original estimate of -3.7 percent. Future growth is expected to remain positive but weak until demand fundamentals improve.
Employment Cost Data Reflect Slow Wage Growth
Total compensation costs for civilian workers inched up 0.5 percent for the three-month period ending June 2010, matching market expectations. The Employment Cost Index comprises wages and benefits, with wages accounting for 70 percent of employment costs. Wages increased 0.4 percent in Q2 for both private and public sectors. Benefit costs in the private sector grew 0.6 percent as a result of rising health benefit costs; this was much lower than the 1.1-percent increase reported in Q1. Benefit cost growth has been weak as companies have passed along health insurance costs to employees.
Annualized total compensation growth was 1.9 percent—the fastest pace since Q1 2009. Total private-sector compensation costs rose 1.9 percent in the 12-month period ending June 2010, unchanged from the same period a year earlier. Private-sector wages and salaries increased 1.6 percent over the past 12 months, the same amount as a year earlier. Private-sector benefit costs increased 2.5 percent compared to 2.3 percent a year earlier.
Due to the weak labor market, wage, salary and benefit growth rates have been falling, which is one reason why consumption remains weak. Compensation growth is expected to grow at a modest pace for the rest of 2010.
Manufacturing Growth Slows in July
The Institute for Supply Management’s (ISM) manufacturing index declined 0.7 points to 55.5 in July as the growth in manufacturing, which has led the economy out of recession, slowed further. July’s decline marked the third consecutive monthly drop, putting the index at its lowest level since December 2009. Although growth has decelerated recently, the reading above 50 indicates expansion is continuing. Declines in new orders, production and imports were drags on the top-line number while employment, exports and inventory added to growth.
While the increase in the employment component is promising, the decline in imports is concerning since it reflects a drop in consumer spending. Economists remain concerned that consumer demand needs to improve further before economic growth can be sustained.
Manufacturing has accounted for about 15 percent of the total increase in private employment this year and may have added 30,000 jobs during July. Manufacturing’s contribution to growth is expected to continue to be positive going forward as companies take advantage of strong profits and hire more workers.
Factory Orders Continue To Fall
The manufacturing sector’s expansion continued to slow as factory orders fell 1.2 percent in June—the second straight monthly decline. Leading the decline was lower demand for steel, construction machinery and aircraft.
The durable goods component of new orders was down 1.2 percent, while new orders of non-durable goods fell 1.3 percent. The past two monthly declines follow nine straight months of increases. With manufacturing now starting to slip, concerns are growing about a slowing economy in the second half of the year.
Recent Economic Releases
|
| Indicator |
Prior
period |
Current
period
(forecast) |
Current
period
(actual) |
| GDP (QoQ) (Q2) |
3.7% |
2.6% |
2.4% |
| Core PCE (MoM) (June) |
0.1% |
0.1% |
0.0% |
| Personal Income (June) |
0.3% |
0.2% |
0.0% |
| Employment Cost Index (Q2) |
0.6% |
0.5% |
0.5% |
| ISM Mfg. Survey (July) |
56.2 |
54.5 |
55.5 |
| Factory Orders (June) |
-1.8% |
-0.5% |
-1.2% |
| Pending Home Sales (MoM) (June) |
-29.9% |
4.0% |
-2.6% |
| Source: Bloomberg |
| Key Interest Rates |
|
Rate Forecast – Futures Market |
| |
7/26/10 |
8/2/10 |
Change |
Q3-10 |
Q4-10 |
Q1-11 |
Q2-11 |
| Fed Funds |
0.25% |
0.25% |
- – - |
0.25% |
0.25% |
0.25% |
0.25% |
| 3m Libor |
0.49% |
0.44% |
-0.05 |
0.40% |
0.43% |
0.50% |
0.61% |
| 2yr UST |
0.59% |
0.55% |
-0.04 |
1.12% |
1.26% |
1.36% |
1.47% |
| 5yr UST |
1.73% |
1.62% |
-0.11 |
1.79% |
1.96% |
2.22% |
2.40% |
| 10yr UST |
2.99% |
2.95% |
-0.04 |
3.18% |
3.27% |
3.39% |
3.58% |
| 30yr UST |
4.01% |
4.05% |
0.04 |
4.30% |
4.37% |
4.46% |
4.46% |
| Source: Bloomberg |
Source: INO.com |
