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GDP revision may give the Fed food for thought

June 28, 2013

With plenty of signs out pointing to momentum in the economy—improvements in factory activity, consumer confidence, new-home sales, and personal income—the downward revision to first-quarter gross domestic product came as a surprise. On June 19, Federal Reserve Chairman Ben Bernanke had rattled markets by mentioning that "letting up a bit on the gas pedal" with the Fed's bond purchases might be appropriate later this year if the economy keeps improving. But this week's GDP revision, along with reassuring statements from the central banks of Europe and China, helped allay market concerns about an imminent change in monetary policy.

For the week ended Friday, June 28, 2013, the S&P 500 Index rose 0.9% to 1,606 (for a year-to-date total return—including price change plus dividends—of about 14%). The yield on the 10-year U.S. Treasury note ended the week flat at 2.52% (for a year-to-date increase of 74 basis points).

First-quarter GDP estimate is lowered

The Commerce Department again lowered its estimate for economic growth in the first quarter of 2013. Its latest reading indicated that economic output grew 1.8% on an annualized, inflation-adjusted basis. That was well above the 0.4% reported for the fourth quarter of 2012, though considerably below the previous estimate of 2.4%.

Consumer spending remained the largest contributor to growth despite January tax increases, but to a lesser extent than earlier estimated. Winter utility bills accounted for a considerable part of the rise. Business spending and inventories also drove growth for the period. Disappointing, though, were a quarter-over-quarter deceleration in fixed investment spending and acceleration in inventories.

Government spending was less of a drag on growth in the first quarter than in the fourth quarter of 2012, thanks to a slower decline in defense spending.

"The Fed has made clear it will implement policy consistent with current economic conditions," said Vanguard economist Andrew J. Patterson, "and a sharp downward revision in GDP such as this, especially considering much of the revision was due to downwardly revised consumer spending, may quell some fears of the central bank tightening policy too soon."

GDP: Under the hood
4Q 2012 1Q 2013
Real GDP growth
+0.4% +1.8%
Major components: Contributions/subtractions
Consumer spending +1.3% +1.8%
Business spending and inventories +0.2% +1.0%
Trade (exports minus imports) +0.3% –0.1%
Federal, state, and local government spending –1.4% –0.9%

Annualized quarterly change, rounded.
Get a closer look at GDP and its components.

Consumer confidence reaches five-year high

Consumers surveyed by The Conference Board about the present economic situation and their expectations for the next six months were more optimistic in June, pushing the Consumer Confidence Index up to 81.4, its highest level since January 2008. That compares with 74.3 in May and 58.4 in January. It should be noted, though, that June's survey results were collected before the recent market volatility.

SubscribeThe present-conditions component of the index rose by 4.4 points, with more respondents saying jobs were "plentiful" and fewer characterizing current business conditions as "bad." Consumers were even more enthusiastic about the short-term outlook for employment and business conditions, pushing that measure up by 8.9 points.

The picture was more muted for income and buying plans. Fewer consumers in June said they expected their income to increase over the next six months, and more indicated their income was likely to stay the same. In keeping with those guarded expectations, consumers' buying plans remained more or less flat.

For durable goods, a solid repeat performance

May orders for long-lasting manufactured goods surprised analysts by rising $8.0 billion, matching April's 3.6% gain. A significant part of that increase came from the volatile transportation equipment segment, as orders rose 10.2%, led by nondefense aircraft and parts. (Aircraft orders at Boeing rose from 51 in April to 232 in May, according to the company's website.)

The Commerce Department data showed more modest increases in orders for many other segments. Notably, orders for core capital goods rose more than 1% for the third month in a row. This category—which includes machinery, computers, and software—is watched closely as a proxy for business spending. Orders for motor vehicles and parts were an exception to the upward trend, falling 1.2% in May despite strong vehicle sales in recent months.

New-home sales remain on the mend

Sales in May of new single-family homes reached a seasonally adjusted annual rate of 476,000, up 2.1% from April and 29.0% from May 2012. Some regions fared far better than others; monthly sales climbed 40.7% in the Midwest and 20.7% in the Northeast but slumped 9.0% in the South.

The inventory of new homes for sale remained near cyclical lows. Although it edged up a little in May to 161,000 units, that level represented a tight 4.1 months of supply at the current sales rate. The median sales price for a new home in May was $263,900, 3.2% lower than in April but 10.3% higher than in May 2012.

Income rise joined by more spending and saving

Personal income rose 0.5% in May—more than expected—mostly because of increases in interest and dividend income as well as government transfer payments such as Social Security income, the Commerce Department reported. Consumer spending rose 0.3%, a welcome development given its importance to the economy and April's disappointing reading. Higher earnings also allowed consumers to save a little more: The savings rate rose to 3.2% in May and was adjusted upward for April from 2.5% to 3.0%.

The economic week ahead

Monday brings a construction spending report along with the ISM Index on manufacturing. Reports are due out Tuesday on factory orders and Wednesday on the ISM Non-Manufacturing Index. Import and export data will be released Wednesday and the closely watched monthly employment report Friday.

Summary of major economic reports
Date Report Actual
value
Consensus
expected value
10-year note yield S&P 500 Index
June 24       +5 bp –1.2%
June 25 Durable-Goods Orders (May)
Source: Commerce Department 
+3.6% +0.9% +3 bp +0.9%
  Consumer Confidence (June)
Source: The Conference Board
81.4 76.8    
  New-Home Sales (May, annualized)
Source: Commerce Department
476,000 464,000    
June 26 Real Gross Domestic Product (Q1 annual rate)
Source: Commerce Department
+1.8% +2.5% –5 bp +1.0%
June 27 Initial Jobless Claims (week ended June 22)
Source: Labor Department
346,000 336,000 –6 bp +0.6%
  Personal Income (May)
Source: Commerce Department
+0.5% +0.2%    
  Personal Spending (May)
Source: Commerce Department
+0.3% +0.4%  
June 28       +3 bp –0.4%
      Weekly change 0 bp +0.9%

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.

Notes

  • 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 possible loss of the money you invest.
  • Past performance is no guarantee of future returns. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.
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