Economic conditions in the U.S. have shown resiliency over the past quarter despite continued global conflicts and the Fed’s gradual easing of its’ quantitative easing program.
In fact, most of the key indicators that we follow are continuing to post positive results year-over-year. Employment is gradually and, more importantly, consistently improving and manufacturers continue to gear up for anticipated future growth. The construction industry has improved from year ago levels but is giving off mixed signals of late, showing strength in new sales and confidence and weakness in housing starts and permits. While this near-term situation bears watching, we believe the construction industry as a whole, has recovered to a more “normal” business cycle.
While global issues, primarily political in nature, cloud the picture in European and emerging market economies, we anticipate the U.S. economy to continue to improve through the end of the year and into 2015.
Here is a summary of some important economic indicators, showing historical information and areas of potential risk that could threaten the economic recovery in the U.S.A.
Retail Sales – Mostly sunny. With the weather no longer an issue, we see a positive, if slight, trend in consumer spending. Both April and May’s readings were revised upward and we are seeing that year-over-year, Retail Sales are up 3.8%. Not only that, but Consumer Confidence is rising as well. June numbers came in at 85.2 vs 82.2 in May and 78.3 in February.
However, as we mentioned in last quarters update, Retail Sales are being impacted by lackluster employment gains, minimal wage growth and growing food, energy and healthcare costs. It is now clear to s consumer is reigning in their spending to cover required living expenses. We continue to anticipate softness in this metric until employment and wage growth strengthen.
Wholesale Trade – Mostly sunny. Durable Goods were up 0.1% month-over-month and up 2.9% from a year ago. Sales of Nondurable Goods were up 1.2% from January and up 3.3% from a year ago. On a year-over-year basis, this is a continuation of the trend we’ve seen for the past several months. Wholesale Trade of Nondurable Goods is growing at a steady rate and will likely continue to in the near term. However, we expect growth to moderate in the second half of 2014
Manufacturing – Sunny. US Industrial Production continues its positive trend. The second quarter once again saw positive gains with all twelve Federal Reserve Districts indicating manufacturing activity continues to expand. Five of the districts, including New York and Chicago, report that growth is “robust”.
Looking forward, we believe we will continue to see a period of acceleration through the second half of 2014 before it moderates going into 2015. Total Manufacturing Production did not slowdown as anticipated. Instead, it rose at an annual rate of 6.7% and it appears to have staying power through the end of the year.
Interest Rates – Sunny. In the second quarter, the 10-year Treasury yield decreased to around 2.5% and is holding steady. We believe yields will be range bound between approximately 2.6% and 2.9%. The Fed has continued to taper the quantitative easing (QE) bond buying program by $10B per month. All in all, no news (or little news) has resulted in interest rate stability over the near term. We continue to expect interest rates to rise slowly through the end of the year and that interest rates will stay historically low into 2015.
Capital Goods New Orders – Chance of Clouds. Nondefense Capital Goods New expanded by 4.9% on a year-over-year basis in May. However, orders have slowed (down 0.5%), shipments have decreased (down 0.7%), unfilled orders have increased (up 0.9%) and inventories have increased (up 1.4%). Overall, we continue to believe we will see slow but moderate growth through the end of 2014 and into 2015.
Construction – Mostly sunny. What a difference a quarter makes. Weather related issues are behind us and the numbers have improved. June existing home sales increased significantly and are now at the highest levels in 8 months. Nonresidential construction spending continues to expand with a year-over-year increase of 6.4%.
The National Association of Home Builders (NAHB) Housing Market Index (HMI), a gauge of homebuilder sentiment recovered to 54 in the second quarter. All three HMI components posted gains in June with Current Sales and Conditions increasing to 57, Future Sales Expectations increasing to 64 and Buyer Traffic increasing to 34. While builder sentiment continues to lean negative, we are seeing confidence improve through antidotal measures, such as the U.S. Construction industry adding 6,000 new jobs in June.
International – Chance of clouds. Concerns continue to growing about the military activity between Russia and the Ukraine. It now appears the European Union countries are beginning to grapple with a slowdown in their economies. Germany, France and Italy all showing slowing Industrial Production.
Conversely, economic data from China continues to improve. China Industrial Production increased 9.2% year-over-year and has improved every month since February. Additionally, the most recent GDP figures came in around 8.9% which is in line what was reported last quarter. And the United Kingdom continues to see economic expansion with a 2.5% year-over-year increase in Industrial Production while unemployment continues to go down.
All-in-all, the global economic picture will remain somewhat cloudy due to geopolitical fog.