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Economic Week in Review: Global strains stress markets

August 08, 2014

This week's economic data continued to signal improvements across the economy—from manufacturing to services to consumer borrowing. The markets, however, were more focused on developments in a number of hot spots in the Middle East and the ongoing tensions between Russia and the West.

For the week ended August 8, 2014, the S&P 500 Index was up 0.3% to 1,931 (for a year-to-date total return—including price change plus dividends—of about 6%). The yield on the 10-year U.S. Treasury note fell 8 basis points to 2.44%, for a year-to-date decrease of 60 basis points).

Services sector strengthens further

The ISM Non-Manufacturing Index rose to 58.7 in July, the highest level since 2005. (A reading above 50 indicates that the sector is expanding.) Among the equally weighted components of the index, the strongest gains were seen in business activity and new orders, but increases were seen in employment and supplier deliveries as well.

In total, 16 non-manufacturing industries reported growth, thanks to a stabilization or improvement in market conditions, with utilities alone reporting a contraction in activity.

Manufacturing and services trends

Across-the-board improvements in factory orders

New orders for manufactured goods rose 1.1% in June, a stronger than expected rebound from the previous month's –0.6% reading. Orders for durable goods—manufactured products expected to last for three years or more—rose 1.7%, helped by the often volatile transportation segment, which saw a surge in orders for commercial and defense aircraft and parts.

Other segments made healthy gains as well, including machinery, computers, and electronic products, which bodes well for business investment. Orders for nondurable goods rose a more modest 0.6%. Compared with a year earlier, overall factory orders were up 2.5%.

Trade deficit narrows

The U.S. trade deficit (exports minus imports) shrank 7% in June to $41.5 billion compared with a revised figure of $44.7 billion for May. Exports inched higher on increased sales of commercial aircraft, automobiles, and pharmaceuticals.

However, more of the drop in the deficit was due to imports. Record-high food imports were offset by declines of more than $1 billion in both automobile and cell phone imports. With the recent energy boom in the United States, petroleum imports also fell, hitting their lowest level in more than three years.

"The shrinking trade deficit in June is supportive of stronger growth in the second quarter," said Vanguard economic analyst Vytas Maciulis. "It means that the next estimate of second-quarter gross domestic product may be revised up from the initial reading. However, while exports are likely to remain strong, the strength of domestic demand is the wildcard in the trade balance outlook."

Consumers continued borrowing for big-ticket items

Consumer credit, excluding mortgages, climbed $17.3 billion in June to a total of $3.2 trillion, according to data released by the Federal Reserve. That represents an increase of 6.5% over the previous year, a little off the 7.4% gain reported for May.

The lion's share of the rise was due to consumers taking on more nonrevolving credit, a category that includes automobiles, appliances, and student loans. Revolving credit, which includes credit card debt, expanded by $942 million, suggesting consumers are still reluctant to significantly increase their discretionary spending.

Productivity swings higher

The productivity of U.S. workers climbed by 2.5% on an annualized basis in the second quarter, according to a preliminary estimate from the Labor Department. That increase follows on the heels of a downwardly revised figure of –4.5% in the first quarter, the sharpest drop in productivity in more than 30 years.

Unit labor costs were unusually volatile as well, rising by only 0.6% in the second quarter compared with a revised first-quarter estimate of 11.8%.

Year over year, productivity was up 1.2% and unit labor costs rose 1.9%.

The economic week ahead

Next week's economic data releases will be light. Retail sales and business inventories are scheduled for Wednesday, followed by the Producer Price Index and industrial production on Friday.

Summary of major economic reports
Date Report Actual
value
Consensus
expected value
10-year note yield S&P 500 Index
August 4       –1 bp +0.7%
August 5 Factory Orders (June)
Source: Commerce Department
+1.1% +0.6% –2 bp –1.0%
  ISM Non-Manufacturing Index (July)
Source: Institute for Supply Management
58.7 56.3    
August 6 U.S. Trade Balance (June)
Source: Commerce Department
–$41.5 billion –$44.8 billion 0 bp  0.0%
August 7 Initial Jobless Claims (week ended August 2)
Source: Labor Department
289,000 302,000 –6 bp –0.6%
  Consumer Credit (June)
Source: Federal Reserve Board
+$17.3 billion +$18.5 billion    
August 8 Nonfarm Productivity (2Q annual rate)
Source: Labor Department
+2.5% +1.5% +1 bp +1.2%
  Unit Labor Costs (2Q annual rate)
Source: Labor Department
+0.6% +1.6%    
      Weekly change –8 bp +0.3%

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 the possible loss of the money you invest.
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