Economic Commentary
Daniel Laufenberg, Ph.D.

Numerous economic data series are released between the publication dates of the Laufenberg Economic Quarterly (LEQ). These commentaries are designed to provide insight on the more recent data and their implications for the economic outlook.

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Surprise!
(August 16, 2011)

If you listen to the financial media, the U.S. economy is heading into recession unless policymakers come to its rescue with another round of stimulus. Proponents of this view claim that the downward revision to first-quarter real gross domestic product (GDP) to a level that was nearly flat with the preceding quarter, the much slower than expected pace of real GDP growth in the second quarter, a housing sector that continues to be a drag on growth, a slowing manufacturing sector, and a slumping consumer sector justify such a rescue effort. Although I concede that the first half of 2011 was weaker than I was expecting, more recent economic data contradict claims of slumping housing, manufacturing and consumer sectors.

First, the housing sector likely will contribute to real GDP growth in the third quarter. According to the Census Bureau, housing starts totaled 604 thousand at a seasonally adjusted annual rate in July, down from a total of 613 thousand in June. At first blush, July housing starts look like a disappointing number. However, the level of starts in June was well above the average for the second quarter, which means that the level of starts in July, although down a bit from the previous month, is still well above the average for the second quarter. Indeed, housing starts in the third quarter are on track to be up 25 percent at an annual rate from the second quarter. In my latest forecast (August 2011 issue of the Laufenberg Economic Quarterly), I show residential investment up 17.3 percent in the third quarter, which at the moment looks to be too low.

Second, financial market participants got a bit of a scare when the Institute of Supply Management announced that the composite diffusion index for manufacturing fell to 50.9 percent in July from 55.3 percent in June. The concern was that manufacturing, which had been one of the few bright spots in this recovery, was starting to fade. According the Federal Reserve Board data on industrial production in July, however, that is not the case. Overall industrial output jumped 0.9 percent in July, following upward revisions in both May and June. As a result, industrial output is on track to increase 5.1 percent at an annual rate in the third quarter.

Moreover, manufacturing output rose 0.6 percent in July, following gains of 0.2 percent in each of the previous two months. Hence, manufacturing output in July, which was the concern of investors just a few weeks ago, is already up 3.2 percent at an annual rate from the second quarter. In the latest forecast, I show manufacturing output up 5.7 percent in the third quarter, which is certainly doable given the solid start to the quarter.

Finally, the consumer is far from slumping. Light motor-vehicle sales rebounded in July to 12.2 million units at a seasonally adjusted annual rate, up from the anemic 11.6 million in June. Although unit sales in July were only slightly above the average level of sales in the second quarter, it bodes well for sales over the next few months given the more recent plunge in oil prices and the Japanese automakers getting U.S. production back on line.

According to the Census Bureau, retail sales rose 0.5 percent in July from a month earlier and were up 2.6 percent at an annual rate from the average for the second quarter. Some contend that the July gain was driven by sales at gasoline stations and motor vehicles. For the most part, they were right. Retail sales excluding automotive, gasoline, and building materials (the controlled measure of retail sales used to calculate personal consumption expenditures) were flat in July compared with June. However, despite being flat versus June, this controlled measure of July retail sales actually was up 2.8 percent at an annual rate versus the second quarter. It seems therefore that consumer spending on goods less autos showed considerable upward momentum at the end of the second quarter and early in the third quarter. In addition, goods prices probably fell in July, led by lower energy prices, suggesting that consumer spending in real terms was even better than suggested by nominal sales alone.

Also, there was some positive news for real consumer spending in July in the industrial production data. In particular, utility production, which was down 9.0 percent at an annual rate for the first half of 2011, surged 2.8 percent in July, which translates into a 13.6 percent annualized gain for the third quarter if nothing changes over the next two months. To the extent that this reflects household demand for energy owing to a return to more normal weather, much of this surge in utility output will show up as spending on real services by consumers in the personal consumption expenditures release for July.

In other words, based on the July data available so far, it looks as if consumer spending on goods and services will show considerable improvement in the third quarter. Moreover, it seems to be consistent with my view that real consumer spending will climb at an annual rate of about 3.0 percent in the third quarter. If the data hold up over the remainder of the quarter, financial market participants will be surprised by the robustness of U.S. economic growth in the third quarter. Stay tuned! period

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For the current economic forecast, as well as other analysis and commentary, please visit the Stonebridge Capital Advisors website.

Dlaufenberg@stonebridgecap.com

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The views expressed here reflect the views of Daniel Laufenberg as of the date referenced. These views may change as economic fundamentals and market conditions change. This commentary is provided as a general source of information only and is not intended to provide investment advice for individual investor circumstances. Past performance does not guarantee future results.


2011 Commentary

Living in interesting times
-- September 8, 2011

A not so pleasant surprise!
-- September 2, 2011

Surprise!
-- August 16, 2011

Debt ceiling politics
-- July 25, 2011

Q2 growth: Another disappointment likely
-- July 14, 2011

Interpreting the ISM manufacturing index and the employment situation report for May
-- June 4, 2011

A slower start to 2011 than anticipated earlier
-- April 14, 2011

Is the dollar's status as the reserve currency at risk?
-- March 21, 2011

More trouble in the Middle East
-- February 26, 2011

Searching for the next debt crisis
-- January 13, 2011

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