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Economic Week in Review: Conflicting clues on what Fed will do

September 06, 2013

Good, perhaps. Not great, certainly. Murky, of course. That perhaps summarizes the gaggle of just-released economic reports. Of particular interest is what clues the reports offer on whether the Federal Reserve will shift gears on its expansionary monetary policy after its policy-setting meeting on September 17-18. The key question: Is economic growth strong enough to warrant the shift? While some reports suggest that the economy is gaining traction, the disappointing reports on jobs suggest how fragile the upswing is.

For the week ended September 6, 2013, the S&P 500 Index rose 1.4% to about 1,655 (for a year-to-date total return—including price change plus dividends—of about 17.8%). The yield on the 10-year U.S. Treasury note was up 16 basis points to 2.94% (for a year-to-date increase of 116 basis points).

A lackluster jobs portrait

The August jobs reports was disappointing. The unemployment rate did decline to 7.3% from 7.4%, but that was tempered by one of the reasons for the drop: Fewer people searching for work because they were discouraged by the chances of finding it. Payroll gains of 169,000 fell short of expectations. And June and July payrolls were unexpectedly revised sharply downwards by a total of 74,000 jobs. However, August's results suggested stronger manufacturing activity, as evidenced by payroll gains in that sector—after declines in June and July. In addition, temp hiring in both manufacturing and services rose, which is viewed as an indication of the strength of new orders.

U.S. employment chart

Fed survey again finds "modest to moderate" growth

The economy expanded at a "modest to moderate pace" from early July through late August, according to the latest finding from the Federal Reserve's Beige Book. This is the same conclusion as the previous edition of the report, which compiles observations about regional economic conditions. The current report characterizes growth in eight of the Fed's regional districts as "moderate." "Modest growth" was reported in Boston, Atlanta, and San Francisco, while Chicago indicated that the pace of economic activity "improved." Consumer spending generally rose on strong demand for cars and housing goods. (Separately, car sales were reported to have climbed to about 16 million units, a post-recession high that beat expectations.) Manufacturing activity "expanded modestly." And residential real estate activity generally "increased modestly," with some reports suggesting that rising home prices and interest rates have spurred "fence sitters" to commit to home purchases.

One surprise, and then another, from ISM's surveys

Two of the Institute for Supply Management's business activity surveys for August came out this week, and each came with a surprise. ISM's manufacturing survey shows strong growth and not the decline that many expected. The manufacturing index increased to 55.7 from 55.4 a month earlier, its third increase in a row. (An index value above 50 signals expansion; below 50, contraction.) Particularly notable was the highest reading in over two years of the index's new orders component. The ISM's service-sector index rose, which was expected—but the extent of the advance exceeded analysts' forecasts. This index rose to 58.6, its highest level since inception in 2008, up from 56.0. Supporting the gain were especially strong readings for new orders and employment.

Trade deficit: from June narrowing to July widening

Rising demand for imports in the United States, reflecting a strengthening economy, and cooling demand from abroad for U.S. exports produced a wider trade deficit in July compared with June, a month that saw the narrowest deficit in almost four years. The $39.1 billion July gap was also wider than had been expected.

Construction spending rose more than expected

Construction spending grew more than expected in July, a shift from June's flat level (itself a revision from an initially reported decline). Behind the July gain was greater spending on private nonresidential structures, including power, utility, and manufacturing companies, as well as continued strength in the residential sector. Compared with a year earlier, spending on single- and multi-family housing rose about 30% and 39%, respectively, although the level of spending is well below prerecession levels. By contrast, public construction declined, reflecting the lingering impact of the recession on state and local budgets.

Because of aircraft, factory orders don't take off

New orders for manufactured goods fell 2.4% in July compared with June, after three months of increases, primarily because of a drop in orders for aircraft. Excluding the volatile transportation category, new orders rose 1.2%. However, some economists were concerned about the drop in orders and shipments of core capital goods, which exclude aircraft and defense spending and which are considered a good indicator of future business activity.

Productivity's pace is higher than initially thought

The nation's productivity, a measure of the efficiency of producing goods and services, rose in the second quarter at an annual rate of 2.3%, which contrasted with the declines of the previous two quarters. The latest estimate was also higher than an initial estimate of 0.9%, as output rose and hours worked fell. Unit labor costs, a key driver of inflation, were unchanged; analysts had anticipated an increase.

The economic week ahead

The week begins with a report on consumer credit on Monday. It ends with three reports on Friday: the producer price index, retail sales, and business inventories.

Summary of major economic reports
Date Report Actual
expected value
10-year note yield S&P 500 Index
September 2 Labor Day holiday—U.S. financial markets closed    
September 3 Construction Spending (July)
Source: Commerce Department
+0.6% +0.4% +8 bp +0.4%
  ISM Index (August)
Source: Institute for Supply Management
55.7 54.5    
September 4 U.S. Trade Balance (July)
Source: Commerce Department
–$39.1 billion –$38.0 billion +4 bp +0.8%
Beige Book
Source: Federal Reserve Board
September 5 Initial Jobless Claims (week ended August 31)
Source: Labor Department
323,000 330,000 +8 bp +0.1%
  Nonfarm Productivity (2Q annual rate)
Source: Labor Department
+2.3% +1.8%    
  Unit Labor Costs (2Q annual rate)
Source: Labor Department
0.0% +0.7%    
  Factory Orders (July)
Source: Commerce Department
–2.4% –1.6%    
  ISM Non-Manufacturing Index (August)
Source: Institute for Supply Management
58.6 57.0    
September 6 Unemployment Rate (August)
Source: Labor Department
7.3% 7.4% –4 bp 0.0%
  Nonfarm Payrolls (August)
Source: Labor Department
169,000 175,000    
      Weekly change +16 bp +1.4%

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.
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