Everyone is jittery about everything. Consumers are jittery about the economy generally and the employment outlook specifically, so they aren’t spending much. Businesses are jittery about the lack of consumer spending, so they aren’t hiring (which is making consumers more jittery) or investing much in equipment either.
Lawmakers are jittery about the upcoming elections, so they aren’t doing much, which makes this period not much different from the rest of the year, but is contributing, nonetheless, to the jitters in the business sector. And the Fed is increasingly jittery about an economic recovery that, it fears, may be losing the modest momentum it had built.
The July employment report may have calmed tingling nerve endings at least a little. Employers added 163,000 workers to their payrolls for the month, well above the projected gains and a much stronger performance than June’s anemic total, which was revised downward to an even lower than initially reported 64,000 gain.
The July labor report elicited sighs of relief from economists, but it didn’t produce wild applause, by any means. The unemployment rate inched up to 8.3 percent from 8.2 percent, indicating that the hiring pace remains well below the level required to absorb the millions of unemployed workers who are seeking jobs.
An Inch Away
The Fed, which was said to be “an inch away” from easing before the July jobs report, is probably half-an-inch closer now, but not quite there yet. The Federal Open Market Committee, the Fed’s policy making arm, said earlier in July that the Fed “will closely monitor incoming information on economic and financial developments… and will provide additional accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.”
Fed Chairman Ben Bernanke conveyed the same message in Congressional testimony, saying, “It is very important that we see sustained progress in the labor market and avoid deflation risk. Those are the things we’ll be looking at as the committee meets later this month and later this summer,” he added.
Sustained progress is hard to find in the recent economic data, but there are some positives to note:
- Retail sales in July were stronger than anticipated following three consecutive monthly declines. Three-quarters of the retailers surveyed by Thomson-Reuters said their results for the month topped their expectations.
- Durable goods orders increased slightly in June, as automobile sales and (notoriously volatile) airplane orders offset anemic corporate spending.
- Service industries expanded in July – another pleasant surprise for analysts who had been predicting continued weakness in this sector. The Institute of Supply Management’s non-manufacturing index increased to 52.6 from 52.1 in June, remaining above the 50 level indicating continued growth.
But the pace of growth remains slow, worrying analysts who see mounting evidence that instability in the European economy, slow growth and political uncertainty in the U.S. are all taking a toll.
Underscoring that concern, consumer spending stagnated in July as consumers pocketed a 0.5 percent income gain instead of taking their wallets to the mall.
Consumer confidence, which usually mirrors spending (and vice versa), moved in the opposite direction. The Conference Board’s monthly confidence survey, which had been spiraling downward, turned positive in July, as consumers who had plenty of reason to be discouraged, became more optimistic about the short-term outlook, pushing that gauge up to 65.9 62.7 in June.
Their confidence wasn’t contagious, however. Respondents to the National Association of Business Economists’ quarterly survey were decidedly glum about the prospects for near-term employment gains and less than upbeat about the outlook for their own companies. Only 23 percent expect their firms to increase hiring this year, compared to 40 percent in the last survey, and only 39 percent reported rising sales, down from 60 percent in April.
“The survey results suggest worsening economic conditions,” concluded Nayantara Hensel, a business professor at National Defense University, who analyzed the results for the trade group.
Stronger than it Looks
Some analysts were more upbeat about recent economic reports – or at least less discouraged by them. “I do think the economy is stronger than the recent data would suggest,” Mark Zandi, chief economist at Moody’s Analytics, told the New York Times. “We’ve had the numbers say underlying job growth is at 80,000 jobs a month, where we could see 150,000jobs a month. Or G.D.P. at 2 percent, where it’s really at 2.5 percent. That will become evident later in the year,” he predicts.
It seems odd to be reporting this month, as we did last month, that housing is a bring spot in an otherwise gray economic picture. But some analysts are now suggesting that housing is providing a tailwind as other sectors slow. Just a few months ago, housing was viewed as a drag on economic growth.
New, existing, and pending home sales all slowed a bit, but they remained well above recent trend lines and on an upward trajectory. Year-over-year, pending sales for July were up nearly 10 percent, existing sales were up 4.5 percent and new home sales (for June) were nearly 15.1 percent ahead of the same month last year.
The National Association of Realtors continues to blame depleted inventories (24 percent below year-ago levels) for the slower sales pace and home builders apparently agree. New home starts increased by nearly 7 percent in June compared with May, putting them nearly 25 percent ahead of the 2011 pace; new construction permits for May, meanwhile, reached their highest level since 2008. And builder confidence, measured by an industry index, increased by nearly 6 points in June, the largest one-month jump in nearly 10 years.
Home Prices Stabilizing
Home prices, hardly a source of good news in recent memory, have also shown signs of stabilizing. The Case-Shiller home price index posted its fourth consecutive monthly increase in May after seven consecutive monthly declines. The index is still down 2.2 percent year-over-year, but that gap is narrower than it was at the end of last year, providing “another clear indication that the housing market is in the midst of a growing comeback,” Joel Naroff, president and chief economist at Naroff Economic Advisors, wrote in a recent note to investors.
Joseph LaVorgna, a housing analyst at Deutsche Bank, agrees. “This [overall] resumption is residential activity cannot be understated as the long awaited housing recovery should help buoy consumer confidence and provide a mild lift to second half economic output after what was likely a disappointing first half of the year,” he told HousingWire recently, adding, “We expect housing to remain a bright spot in what is otherwise likely to be a disappointing quarter for [economic] growth.”