China's Great Divide: A New Cultural Revolution?
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World View & Market Commentary.
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It's official but it's worse than believed. The soft patch continued into the second quarter as GDP growth for posted at a very sluggish 1.3 percent annualized rise, following a downwardly revised increase of 0.4 percent in the first quarter. Analysts had forecast a 1.9 percent boost for the latest quarter and the first quarter was previously estimated at 1.9 percent. Today's report includes standard annual revisions going back three years for most series.
Demand numbers improved but barely. Final sales of domestic product improved to up an annualized 1.1 percent from 0.0 percent (unchanged) in the first quarter (previously 0.6 percent). Final sales to domestic purchasers also nudged up, rising 0.5 percent from 0.4 percent in the prior period (previously 0.4 percent).
Most of the anemia in the second quarter came from the consumer sector which came to a screeching halt with a 0.1 annualized percent uptick in the first quarter, following a 2.1 percent rise the prior quarter. Government purchases declined modestly while gains were seen in net exports, business investment in structures and equipment, and even residential investment. Inventories nudged up.
Economy-wide inflation according to the GDP price index only incremental change in momentum, rising 2.3 percent, following an increase of 2.5 percent in the first quarter. Analysts expected a 2.0 percent gain.
Increasing acceleration in benefit costs fed an outsized 0.7 percent second-quarter increase in the employment cost index, the largest increase of the recovery. Benefits, which make up 30 percent of the index, rose 1.3 percent on top of the first-quarter's 1.1 percent jump with wages & salaries, which make up the remaining 70 percent, showing no acceleration at plus 0.4 percent.
When stripping out government workers and looking at just the private sector, benefits rose a quarterly 1.6 percent vs 1.2 percent in the first quarter with wages & salaries showing incremental acceleration at plus 0.5 percent. Add these two together and total compensation in the private sector -- and this is a special sign of increasing pressure -- rose 0.8 percent vs 0.5 percent gains in the prior two quarters.
Year-on-year rates tell the same story with benefits up 3.6 percent vs 3.0 percent in the first quarter and wages & salaries unchanged at plus 1.6 percent. These readings are for both government and private workers combined. Total year-on-year compensation is up 2.2 percent from 2.0 percent in the first quarter. A look at just the private sector shows an outsized three tenths increase in the year-on-year rate to plus 2.3 percent.
If the economy were in a solid growth mode these results would definitely be a concern for Federal Reserve policy makers who keep a close eye on compensation and often comment in detail about benefit costs. But the economy, based if nothing else on this morning's accompanying release of GDP data, isn't in a solid growth mode, making these early signs of compensation inflation a distant secondary concern.
Initial jobless claims dropped a very sharp 24,000 in the July 23 week to 398,000 for the first sub-400,000 reading since early April (in a partial offset the prior week was revised 4,000 higher to 422,000). The four-week average of 413,750 is down a steep 8,500 in the week for a nearly 15,000 improvement from the month-ago reading, a comparison that points to improvement for the monthly jobs report.
Continuing claims have also been coming down, down 17,000 in the July 16 week to 3.703 million. The unemployment rate for insured workers is down one tenth to 2.9 percent.
One factor that may cloud today's report is uncertainty about retooling in the auto sector, a factor where timing is always hard to gauge and where uncertainty is even greater this year due to ongoing production cutbacks tied to Japan. Minnesota, where the government is shut down, is also a special factor though the state did not provide any related details this week. Yet given that the Labor Department isn't citing any special factors, today's report offers badly needed good news for the stock market.
Headline durables disappoint and ex transportation is soft but the picture is more complex. New factory orders for durables in June fell 2.1 percent, following a rebound of 1.9 percent the prior month (previously up 2.1 percent from the factory orders report). The June advance came in below the median forecast for a 1.0 percent rise. Excluding transportation, durables edged up 0.1 percent after rebounding 0.7 percent in May.
Transportation was the weakest component, dropping a sharp 8.5 percent, following a 5.8 percent rebound in May. All major subcomponents of transportation were down. For June, motor vehicles slipped 1.4 percent, nondefense aircraft dropped 28.9 percent, and defense aircraft fell 205 percent. But Boeing is expected to boost nondefense aircraft soon and autos are expected to recover from supply shortages from Japan.
Ex-autos, weakness was in machinery, down sharply. All other industries in ex autos were up.
Within ex-autos, machinery dropped 2.3 percent in June. On the positive side, gains were seen in primary metals, up 1.0 percent; computers & electronics, up 0.2 percent; electrical equipment, up 0.4 percent; and "other," up 0.2 percent.
So, the real picture is a mostly positive June with isolated weakness in transportation and machinery.
Focusing on investment, new orders for nondefense capital goods excluding aircraft have been volatile but slowly trending up. New orders for nondefense capital goods excluding aircraft slipped 0.4 percent in June, following a 1.7 percent gain the month before. Shipments for this series advanced 1.0 percent, following a 1.3 percent increase the month before.
Overall, the picture for durables manufacturing is mixed, though recovery from temporary weakness in nondefense aircraft and autos should bump up orders and production in durables manufacturing in coming months.
On the news, equity futures eased and Treasury rates nudged down.
The purchase index fell 3.8 percent in the July 22 week to extend a run of weakness that points to trouble for July home sales. The refinance index, which spiked higher earlier this month, fell back 5.5 percent. Rates moved slightly higher in the week with 30-year mortgages averaging 4.57 percent.
Growth in national business activity is below historical trend based on the Chicago Fed's index which comes in at minus 0.46 in June vs a downwardly revised minus 0.55 in May. At minus 0.60, the three-month average is at its lowest level since October 2009. The three-month average in May is revised lower to minus 0.31. Weakness in personal consumption & housing is weighing most heavily on the index followed by employment. Production & income is also a negative with sales, orders & inventories the only plus.