Main Street Blues: Post-Fed Macro Indicators Reveal Economic Weakness

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US unemployment claims rose in mid-July while consumer sentiment slipped, reflecting insufficient strength in the broader economy; subsequently, the Atlanta Fed lowered their GDP growth projections to an annualized 1.8 percent.

Kristian Rouz – Discouraging news hit market sentiment a day after the Federal Reserve delivered an overly optimistic message highlighting the strength of the economy, while confusingly abstaining from raising interest rates.

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Both the labor market and consumer confidence demonstrated negative dynamics in the recent weeks, supporting the view that economic expansion is not robust enough to justify a further normalization of monetary conditions within the framework of current economic policy. As the market consensus regarding the timing of the next rate hike has shifted further into 2017, recession aversion measures might be a more urgent necessity.

Out-of-work claims advanced 14,000 to 266,000 in the fourth week of July. While the overall number is still below 300,000, indicating relative strength, the absence of prominent seasonal factors affecting these dynamics is stirring concern. The Labor Department data exceeded previous forecasts that 262,000 jobless claims would be filed by 23 July, and now the measure stands at its second-lowest level since 1973.

The Labor Department data had no immediate effect on the fixed income market, while stock futures and the greenback fluctuated up and down, suggesting that markets were pricing in the unemployment outlook as long as the overall claims do not exceed 300,000.

“Claims at this point are telling you that you’re really near full employment,” Brett Ryan of the New York branch of Deutsche Bank Securities Inc. said. “There’s no evidence that layoffs are picking up. The labor market’s chugging along.”

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As the US economic growth outlook remains moderate, a pickup in hiring is unlikely to happen soon, meaning the job market movements suggest that low inflation will linger in the mid-term. That said, the Fed, which is tightly monitoring inflation, is poised to abstain from any hikes in the coming months.

The overall official unemployment rate rose to 4.9 percent in June from 4.7 percent as graduates entered the workforce. Payrolls advanced to 287,000 that same month.

Meanwhile, consumer confidence slipped last week to its lowest level since mid-June (at that point battered by dismal job gains in May), according to the Bloomberg Consumer Comfort Index, with all key measures such as views on economy, the personal finances index, and the buying climate having declined. The political excitement, gains in the stock market and employment dynamics have all affected shopping enthusiasm among consumers.

Adding to the overall discouragement, the Federal Reserve Bank of Atlanta lowered its 2Q16 GDP estimate to 1.8 percent from 2.4 percent.

“After the U.S. Census Bureau's inaugural release of its advance economic indicators report, which covers retail and wholesale inventories and foreign trade in goods, the nowcast of the contribution of net exports to second-quarter real GDP growth declined from 0.17 percentage points to –0.10 percentage points and the nowcast of the contribution of inventory investment to growth declined from –0.63 percentage points to –0.79 percentage points,” the Atlanta Fed said.

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It can be inferred from this GDP estimate that the stronger dollar is hindering US exports, and investors’ run for safety into bonds slashed percentage points from the Q2 GDP. 

Apart from all this data, the US homeownership rate has dropped to its lowest since 1965 amid credit contagion, mortgage affordability issues, stickiness in wages and overall stagnation in wealth accumulation. The measure slid to 62.9 percent from 63.5 in 2Q16, according to Census Bureau data.

“One of the biggest hurdles now is affordability. Home prices are rising much faster than incomes, so it’s hard for buyers to save for a down payment,” Mark Vitner of Charlotte, NC-based Wells Fargo Securities, LLC said.

Further complicating the outlook, rents are advancing at an accelerated pace due to the declines in homeownership, thus affecting consumer sentiment as well.

In such an environment, inflation and broader economic growth are unlikely to pick up unless a comprehensive change in economic policies is enforced, including credit normalization, Main Street reinvestment, and a major infrastructure upgrade, thus easing pressure on the consumer.

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