The theme of today’s data seems to be higher q2 gdp than otherwise, but for the wrong reason- over production- as spending weakened and unwanted inventories rose.

Nice headline number for durable goods orders but most of the gain was in civilian aircraft which happens every year about this time. However, as previously discussed, the manufacturing sector is chugging along at modest levels after the large dip from the drop in oil related capital expenditures about 2.5 years ago:

Highlights

Aircraft orders don’t dribble out day by day, they come in big monthly batches and an especially big one in June that masks otherwise mixed results. Total orders surged 6.5 percent to top Econoday’s consensus for a 3.5 percent gain and high estimate for 6.0 percent. But when excluding transportation equipment that includes a 131 percent surge in civilian aircraft, orders could manage only a 0.2 percent gain which is below the 0.4 percent consensus and just making the low estimate.

But tipping the balance back in favor of strength is a 1 point upward revision to May where the decline is now only 0.1 percent. The ex-transportation reading gets a 1/2 point upward revision to a 0.6 percent gain with core capital goods (nondefense ex-aircraft) really showing strength, now at plus 0.7 percent vs a small initially reported decline.

But the readings for June aren’t that great with core capital goods moving back into the negative column at minus 0.1 percent. Other areas of weakness include motor vehicles which have been suffering and where the June decline is a sizable 0.6 percent.

For the second-quarter as a whole, however, June’s non-aircraft weakness is offset by the big gains in May. And specifically for Friday’s GDP report, a 0.4 percent June rise in inventories will be a solid plus with a 0.2 percent rise for shipments of core capital goods, that follows 0.4 and 0.2 percent gains in May and April, a modest plus.

But for forward momentum, the weakness in June doesn’t point to building strength for July. Durable orders have not been consistently strong this year though there are more favorable aspects to today’s report than unfavorable with the second-half outlook for the up-and-down factory sector now a bit more upbeat.

This chart is not adjusted for inflation:

Not including aircraft orders:

Looks like spending shortfalls are resulting in unsold inventories (not good):

Highlights

Retail inventories will be adding to second-quarter GDP, rising 0.6 percent in both June and May. Rising inventories are a plus for GDP but a challenge for retailers where sales have been flat and suggest that the inventory build may be unwanted.

Same here:

Highlights

Wholesale inventories in June are a plus for second-quarter GDP, rising a sizable 0.6 percent following May’s revised 0.4 percent build.

More signs of a weakening US consumer, as imports of consumer goods fell as domestic
inventories rose:

Highlights

Net exports in second-quarter GDP look to get a break as June’s goods deficit is a smaller-than-expected $63.9 billion vs expectations for $65.0 billion. Exports surged 1.4 percent in June led by food products but also including a big gain for capital goods exports and also vehicle exports. Imports of goods fell 0.4 percent with sizable declines for industrial supplies and consumer goods.

In another plus for second-quarter GDP, advance data on wholesale and retail inventories, which were also released with the goods report, both rose 0.6 percent.

The burst in exports is a positive not only for GDP but for a factory sector which, as reflected by this morning’s durables report, is still mixed but looking better.

Weaker lending here as well as the US:

Euro zone corporate lending slows from post-crisis high

By Jason Lange and Lindsay Dunsmuir

Jul 26 (Reuters) — Corporate lending in the 19-country currency bloc grew by 2.1 percent in June, a big slowdown from the previous month’s 2.5 percent when growth was at its best pace since 2009. “The decline in the annual growth rate of loans to non-financial corporations in June reflects to a significant extent intragroup transactions,” the ECB said about the data. Lending to households meanwhile grew by 2.6 percent in June, unchanged from the previous month when it hit its highest pace since March 2009. The annual growth rate of the M3 measure of money circulating in the euro zone rose to 5.0 percent last month from 4.9 percent in May.

New homes aren’t built without permits, which have flattened as well, and are therefore not adding as much to growth:

Highlights

New home sales are steady near the best levels of the expansion, at a 610,000 annualized rate in June. The 3-month average is 597,000 which is, however, noticeably below the first-quarter cycle peak of 617,000. This is a negative for second-quarter residential investment in Friday’s GDP report.

But the upshot of today’s report is mostly positive. Sales are very strong in the West which is a key region for new homes. Sales in the region rose 12.5 percent in the month to a 180,000 pace and are up 33 percent year-on-year. But sales in the South, another key region and the largest one, fell in June, down 6.1 percent to a 323,000 pace. June sales were up in the Midwest, at a 66,000 rate, and flat in the Northeast at 41,000.

Sales got a lift from lower prices in the month, down 4.2 percent for the median to a still imposing $310,800. Year-on-year, the median is down 3.4 percent and looks low compared to the 9.1 percent gain for on-year sales.

Supply offers limited good news, rising but only slightly at a 1.1 percent monthly gain to 272,000 units. Relative to sales, supply is steady at 5.4 months vs 5.3 and 5.5 in the prior two months.

New home sales at least didn’t move backwards as did Monday’s existing home sales data. Low mortgage rates and high levels of employment are important positives for the sector which, despite up-and-down readings since the Spring, is still a positive force for the economy.

This tends to lead industrial production:

These house prices are inflation adjusted, and you can see they are still well below the prior peak:

Mirrors the deceleration in mortgage lending:

Highlights

The slip in pending home sales was no false signal as existing home sales fell 1.8 percent in June to a lower-than-expected annualized rate of 5.520 million. Year-on-year, sales are still in the plus column but not by much, at 0.7 percent which is the lowest reading since February.

Compared to sales, prices are rich with the median of $263,800 up 6.5 percent from a year ago. Another negative for sales is supply which fell 0.5 percent in the month to 1.96 million for an on-year decline of 7.1 percent. Relative to sales, supply is at 4.3 months vs 4.2 months in May.

High prices appear to be keeping first-time buyers out of the market with the group representing 32 percent of sales vs 33 percent in May and 35 percent for all of last year.

Rising prices and thin supply, not to mention low wages, are offsetting favorable mortgage rates and holding down sales. Housing data have been up and down and unable to find convincing traction so far this year. Watch for new home sales on Wednesday where general strength is the expectation.

looks like sales have gone flat since the election:

Surveys like this generally spiked up with the presidential election while ‘hard data’ releases generally decelerated:

“The seasonally adjusted IHS Markit Flash US Services PMI Business Activity Index came in at 54.2 in July 2017, unchanged from the previous month’s five-month high and slightly above market expectations of 54.1. New work increased the most since July 2015 amid an improving economic backdrop and greater willingness to spend among clients. leading to stronger job creation and a sustained rise in volumes of work outstanding. On the price front, input cost inflation eased from June’s peak while average prices charged rose the least in three months. Services PMI in the United States is reported by Markit Economics.”

Trumped up expectations as reflected in the various surveys continue to fade, and fall in line with the decelerating ‘hard data’:

Highlights

There finally may be cracks appearing in Philly Fed which has, since the election, been signaling break-out strength for the Mid-Atlantic manufacturing sector. The general conditions index looks solid at 19.5, still very strong though down from 27.6 in June and the least robust result since November. But details — which in this report are not reflected in the headline index — are the flattest since late last year.

New orders, at only 2.1, are down more than 20 points in the month for the worst reading since August last year. Unfilled orders show better strength at 7.2 but are still the weakest since December. Employment, at 10.9, is also the softest since December as are selling prices, at 9.0. Shipments, still strong at 12.2, are at the lowest rate of month-to-month growth since September last year with the workweek, still positive at 3.8, the lowest since November.

This report has been a puzzle all along, signaling post-election strength that was not matched at all by the national factory sector where growth has been no better than moderate. Though indications in today’s data still point to growth, they definitely are pointing to slowing which could either signal that this report is falling into line with actual national growth or, possibly, that national growth may be pivoting lower. In any case, this report is based on a small volunteer sample from only one area of the country.

Highlights

The consumer comfort index, which fell to a post-election low in the prior week, rebounded 6 tenths in the July 16 week to a 47.6 level that is still, however, the lowest since February. Confidence readings appear to be leveling out after their post-election surge.

No homes built without permits, so this is the real thing. Note how permits are just over half of what they were at last cycles highs, and how they’ve nearly entirely stopped growing going on 2 years now:

I still suspect it’s all about said benefits having been made much harder to get, especially with states working with employers to help them let people go in a way that denies them benefits which are an expense to both the state and the employer. So I remain cautious about reading this as a sign of economic strength:

The weak euro, which was entirely due to portfolio shifting rather than trade flows, was an inflationary bias that worked to prevent unwanted deflation, and at the same time supported the growth of the trade surplus, which has been supporting positive GDP growth. With the euro now reversing the ECB could find it that much more difficult meeting it’s inflation target, and any reversal of the trade surplus risks negative growth for the entire euro area:

This is not looking constructive:

Looks to me like this opens the door to fiscal relaxation!!!

“In an economy with its own fiat currency, the monetary authority and the fiscal authority can ensure that public debt denominated in the national fiat currency is non-defaultable, i.e. maturing government bonds are convertible into currency at par. With this arrangement in place, fiscal policy can focus on business cycle stabilisation when monetary policy hits the lower bound constraint. However, the fiscal authorities of the euro area countries have given up the ability to issue non-defaultable debt. As a consequence, effective macroeconomic stabilisation has been difficult to achieve. Coordinating the fiscal policy of the individual countries around a common euro area, non-defaultable debt instrument would improve business cycle outcomes. Corsetti et al. (2016) describe this proposal in greater detail and discuss possible challenges, including the risk of a restructuring of national public debt”.

Source: https://www.ecb.europa.eu/pub/economic-research/resbull/2017/html/ecb.rb170629.en.html

Income a bit better than expected but last month revised down, and the composition of income was not promising. Spending was down as expected, in line with decelerating growth of consumer credit, and price level indicators were very soft as well:

Highlights

May was not a strong month for the consumer. Income did rise 0.4 percent but it wasn’t because of wages & salaries which could manage only a 0.1 percent gain. It was personal income transfers and proprietor income that gave a boost to income which the consumer, however, moved into savings, which rose 4 tenths to a 5.5 percent rate, and not spending which could do no better than expectations, at a 0.1 percent increase.

Spending was weakest in nondurable goods, down 0.5 percent in the month but, in an important note, reflected low energy prices not low demand. But spending on durables was also negative, down 0.3 percent. The positive is a moderate 0.3 percent gain for the biggest category and that’s services.

Price data are very soft, up only 0.1 percent for the core rate (less food & energy) for a year-on-year rate of only 1.4 percent, down 1 tenth in the month. This is the third decline in a row for the yearly rate and the weakest showing in a year-and-a-half. The overall PCE fell 0.1 percent with this year-on-year rate also at 1.4 percent for a 3 tenths decline.

The second leg of the second quarter did not turn out well for the consumer nor for GDP. But the weakness in price data is a more strategic concern for monetary policy makers who may be removing stimulus into inflationary headwinds.

Still on the downtrend line from when oil capex collapsed:

Better than expected survey:

Also a bit better than expected, though expectations continue to revert:

Highlights

The consumer sentiment index regained some momentum in the second half of the month, rising to a final 95.1 that implies a 95.7 or so reading for the second half of June based on the mid-month flash of 94.5. Yet even so, June shows tangibly less strength than the 97.1 in May.