It’s Monday and that means it’s time to review last week’s economic data and identify which pockets of the economy are heating up and which are slowing down. Let’s take a look at the week’s big headlines, and discuss the pros and cons of each.
Pro: Construction Activity At Four-Year High
In July, overall construction spending rose 0.6% to an adjusted annual rate of $900.8 billion. This is double the pace that economists had expected and it also represents a turnaround from the 0.6% drop we saw in June. In July, both single-family and apartment construction picked up while government projects fell 0.3%. Construction spending is now at a four-year high. Total construction is 5.2% higher than it was in July 2012. Residential activity alone is up 17.2% over last year. This is all obviously great news for the housing sector, but now that mortgage rates are on the rise, the momentum in the housing market may cool.
Con: Imports Surged in July
In July, the U.S. trade gap widened 13.3% to $39.1 billion. Even so, this is a less dramatic increase than expected; the consensus called for a $41.5 billion trade deficit. Imports rose 1.6% in July, while exports slipped 0.6%. Notably, auto imports are now running at an all-time high. Despite rising imports, in the past year, the U.S. trade deficit has fallen about 10%. Due to the strong domestic petroleum market, exports have risen four times faster than imports. Even so, the rising trade deficit will likely prompt economists to trim their third-quarter GDP estimates. Currently, the consensus is calling for the economy to grow at a 2.1% annual pace this quarter.
Pro: Layoff Activity Is Near a Six-Year Low
Last week, jobless claims fell 9,000 to an annual rate of 323,000. Given that economists had forecast a rate of 335,000, this was a larger-than-expected drop. Meanwhile, the four-week moving average declined by 3,000 to a rate of 328,500. The latest decline in the four-week moving average means that layoff activity is now at a six-year low. In the past two months alone, jobless claims have fallen 5%. However, we still have a ways to go. The unemployment rate will need to fall to a range of 5% to 6% for us to be back at levels associated with a normal economy.
Con: Business Investment Fell Off a Cliff in July
In July, orders for factory goods fell 2.4%—representing the largest slump in four months. Even so, this was less severe than the 4% drop forecast by economists. Breaking it down, orders for nondurable goods rose 2.4% but durable goods orders fell 7.4%. Excluding the volatile transportation category, factory goods orders climbed 1.2%. But when you exclude just aircraft and military equipment, capital goods orders dropped 4%, the steepest decline since February. This is important because this measure is an indicator of business investment. This follows the trend set by last week’s durable goods results—business spending is on the decline. These results, compounded by the latest trade data, suggest that third-quarter GDP will rise less than initially forecast.
Con: Labor Department Backtracks on June and July Payrolls
The Labor Department announced that 169,000 jobs were created in August. This was in line with the consensus estimate of 170,000. Meanwhile the unemployment rate declined to 7.3%, the lowest rate since December 2008. Economists had expected the rate to tick up to 7.5%. However, the shocking news associated with the payroll report was that the Labor Department revised its payroll reports for June and July down dramatically. In total, the revisions wiped out 74,000 jobs across the two months. Also disturbing is that the labor force participation rate declined to 63.2%, which is the lowest level since 1978. While the headline figures may seem good, there clearly is some double-counting going on right here. We’ve seen several sets of downward revisions from the Labor Department this year, so I would take any future Unemployment Rate reports with a grain of salt.