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Economic Week in Review: Signs of a second-quarter comeback

June 27, 2014

Although data out this week showed the U.S. economy faltered in the first quarter, other reports pointed to a fairly strong snapback since then. Indicators for the housing market suggest it is regaining some of the traction it lost over the winter. Improvements also were noted for personal income in May and consumer confidence in June.

For the week ended June 27, 2014, the S&P 500 Index was unchanged for the week to 1,961 (for a year-to-date total return—including price change plus dividends—of about 7.2%). The yield on the 10-year U.S. Treasury note was down 10 basis points for the week to 2.53% (for a year-to-date decrease of 51 basis points).

Economy much weaker than forecast in the first quarter

The U.S. economy shrank 2.9% in the first three months of 2014 on an annualized basis. The Commerce Department’s third estimate for gross domestic product (GDP), the value of all goods and services when adjusted for inflation, was sharply lower than its second estimate of –1.0% and the initial estimate of +0.1%. This was the weakest reading since 2009.

Much of the downward revision was because of consumer spending, which is now thought to have contributed only 0.7 percentage points to GDP versus 2.1% in the previous estimate. Exports were also lower, resulting in a bigger drag from trade on GDP.

The financial markets largely took the latest growth estimate in stride, however, given the number of one-time factors affecting first-quarter data, including severe winter weather across much of the country, the expiration of temporary benefits for the long-term unemployed, and an excessive buildup of inventories in the second half of 2013.

GDP: Under the hood
Real GDP growth estimates (annualized)
–1.0%  –2.9% 
Components: Contributions/subtractions (percentage points)
Consumer spending +2.1 +0.7
Housing-sector investment* –0.2 –0.1
Business spending and inventories –1.8 –1.8
Trade (exports minus imports) –1.0 –1.5
Federal, state, and local government spending –0.2 –0.1

*Together with business spending and inventories, the combined amount equals the "investment" category of GDP.
Percentages may not add up because of rounding.

Get a closer look at GDP and its components.

Existing-home sales regain some lost ground

After some retrenchment in the housing market, sales of previously owned homes in May posted their strongest gain in almost three years, according to the National Association of Realtors. Sales climbed 4.9% from April to a seasonally adjusted annual rate of 4.89 million units. All of the improvement was seen in single-family home sales, which increased to 4.30 million units from 4.07 million in April, while condominium and co-op sales held steady at 590,000. While the number of existing homes on the market grew, sales increased at an even faster pace, so supply dropped to 5.6 months from 5.7 months in April. The median existing-home price climbed to $213,400 from $201,500 a month earlier. All regions saw higher sales, with the Midwest leading the upswing.

Compared with a year earlier, however, sales were down 5% in May and the percent share of first-time buyers edged down from 29% in April to 27%.

"Rising inventory bodes well for slower price growth and greater affordability, but the amount of homes for sale is still modestly below a balanced market," said Lawrence Yun, the chief economist for the National Association of Realtors.

New-home sales show an even stronger upswing

Sales of newly built homes surprised by surging 18.6% to a six-year high of 504,000 units in May on a seasonally adjusted annual basis. While new-home sales account for only a small part of home buying and monthly numbers tend to be volatile, their jump added to signs that the housing sector is regaining some momentum. With inventory holding steady, the number of new homes on the market fell to a very low level—4.5 months of supply at the current sales rate and down from 5.3 months in April. Sales were higher across the country, with the Northeast and West showing the strongest monthly increases. The median price for a new home rose from $269,700 in April to $282,000. 

Taking a longer-term view, new-home sales were up 16.9% and the median price was 6.9% higher compared with a year earlier.

More confidence among consumers

The Conference Board’s Consumer Confidence Index rose to 85.2 in June, its highest reading since 2008. Consumers were more upbeat about jobs and about the economy six months out, but even more of the improvement in the index came from their assessment of the current state of affairs. A larger number of respondents in the survey agreed that jobs were "plentiful" at the moment and business conditions were "good," with fewer respondents saying the contrary.

Even though fewer respondents reported they expected to earn more in the coming six months, more reported plans to purchase big-ticket items including appliances, cars, and homes.  

"Consumer indicators such as disposable income and lower debt burden (as a percentage of income) may prove supportive of growth in consumer spending," said Vanguard economic analyst Vytas Maciulis. "Easing credit standards along with improvement in job growth may also have a positive impact on consumer spending going forward."

Personal income rises faster than spending

Personal income rose in May for a fifth consecutive month with a gain of 0.4%. That figure was bolstered by robust growth in dividend income along with a 0.4% increase in wages compared with 0.3% a month earlier.

Personal spending, which was flat in April, increased 0.2% in May. Consumers were especially willing to open their wallets to buy more durable goods, but spent more on services and nondurable goods as well. With personal income growth outstripping spending, the savings rate rose to 4.8%—a eight-month high.

Durable-goods orders dented by a volatile defense sector

New orders for long-lasting goods manufactured in the United States fell 1.0% in May. Much of the decline stemmed from a 31.4% drop in defense orders, in sharp contrast to their 38.2% increase the previous month. New orders for nondefense aircraft and parts fell 4.0%, adding to the downdraft.

Excluding the defense sector, durable-goods orders rose 0.6% in May. A bright spot was core capital goods orders, which are often seen as a sign of future business investment—they increased 0.7%. Shipments of these goods, which include computers, electronic equipment and machinery, increased as well, rising 0.4%.

The economic week ahead

Reports scheduled for next week include construction spending and the ISM Manufacturing Index on Tuesday, followed by factory orders on Wednesday. With the financial markets closed Friday for the Independence Day holiday, the closely watched employment situation will be released on Thursday along with reports on international trade and the ISM Nonmanufacturing Index. 

Summary of major economic reports
Date Report Actual
expected value
10-year note yield S&P 500 Index
June 23 Existing-Home Sales (May, annualized)
Source: National Association of Realtors
4.89 million 4.73 million 0 bp 0.0%
June 24 Consumer Confidence (June)
Source: The Conference Board
85.2 83.5 –4 bp –0.6%
  New-Home Sales (May, annualized)
Source: Commerce Department
504,000 400,000    
June 25 Durable-Goods Orders (May)
Source: Commerce Department
–1.0% 0.0% –2 bp +0.5%
  Real Gross Domestic Product (1Q, annual rate)
Source: Commerce Department
–2.9% –1.7%    
June 26 Initial Jobless Claims (week ended June 21)
Source: Labor Department
312,000 310,000 –4 bp –0.1%
  Personal Income (May)
Source: Commerce Department
+0.4% +0.4%    
  Personal Spending (May)
Source: Commerce Department
+0.2% +0.4%    
June 27       0 bp +0.2%
      Weekly change –10 bp 0.0%

bp=basis points. 100 basis points equal 1%. For example, if a bond's yield rises from 5.0% to 5.5%, the increase is 50 basis points.


  • The economic statistics presented in this report are subject to revision by the agencies that issue them. For more information on the reports mentioned in this article, read our Guide to major U.S. economic reports.
  • All investing is subject to risk, including the possible loss of the money you invest.
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