Behind the Numbers
Most of the discussion among business writers over the past month has involved whether and when the Federal Open Market Committee will change policy regarding bond purchases. The minutes of the June meeting suggested to some that a decline in purchases was soon to come. Bond yields shot upward, and mortgage rates jumped a full percentage point. Various FOMC members then spent the next several weeks re-explaining their position that more or less bond purchasing may be done based on incoming economic data.
This leads me to a secondary thought, whether a "soft patch" in the economic expansion will occur this year. Economic growth slowed from the second to the third quarter in 2011 and from the first to the second quarter in 2012. Speculation that second-quarter growth this year would be slower than that of the first quarter (1.8 percent) proved correct: The economy grew at an annual rate of 1.7 percent from April through June, the government said Wednesday. So the suggestion that the FOMC will begin to taper its purchases of bonds as early as September is off base.
A quick look at some second-quarter numbers signaled that GDP growth would not be all that robust. Consumers just took June off. Retail sales (without autos) were flat, with falling sales in important categories like electronics, building supplies and restaurants. Retail sales (excluding auto sales) increased only 0.4 percent for the second quarter over the first quarter, and declines in gasoline prices did not translate into higher sales of other items. Motor vehicles remained the item of choice for consumers during the past year, but these sales were enough to give second-quarter GDP a good boost.
The state of the housing market looks similar. Both housing starts and building permits fell a bit in June. I'm not concerned about a trend here, since start levels are still 10.4 percent above June 2012 levels and permit levels are 16.1 percent above June 2012 levels. Most of the decline lately has been in multifamily units. Single-family permits and starts are holding up well, but the multifamily decline signals a little slowdown in the overall addition to GDP by housing. Existing home sales also dropped a bit in June as higher mortgage rates took a few buyers by surprise. However, prices remain firm, foreclosures are shrinking, and I expect the market for existing homes to strengthen again in the third quarter. Sales of new homes in June showed no weakness, up 38 percent from year-ago levels, with solid price increases and a low supply level.
I'm a little more concerned with employment numbers. New jobless claims have struggled to stay below 330,000 and are currently running around 345,000. Good long-term numbers need to be below 300,000. There is some good news in continuing claims, which have fallen by roughly 300,000 in the past year. The labor force is growing as recent grads and people re-entering the job market have pushed up the job seekers. Job creation of 170,000 to 200,000 a month is helpful but not sufficient to put the needed zip into GDP growth.
The good news remains inflation. While the consumer price index rose 0.5 percent for June, the rate was only 1.8 percent for the past year. The annual rate without food and energy was 1.6 percent, well below levels that would worry the FOMC. A shift in energy prices boosted the annual producer price index increase to 2.5 percent in June, but that level is already receding. There just isn't any bad news to be found in the inflation numbers.
Global conditions remain mostly neutral for my forecast. While GDP in the United Kingdom looks better, most other nations need stimulus to break out of a negative trend. China is meeting lower GDP forecasts. It doesn't seem that our export business was much of a help to GDP in the second quarter, nor will it be in the second half of the year.
So the numbers aren't there for Fed changes anytime soon, nor should there be much of a "soft patch" in the economy. All ahead slow remains the course.
Gregory S. MacKay is senior vice president and chief economist of Canandaigua National Bank and Trust Co.
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