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Economic and Market Review

By: Ryan McCarroll
Risk Analyst


The Commerce Departmentís first estimate at second quarter GDP firmly beat expectations. The 1.7% increase in real GDP compared to the +1% consensus by economists. The release was not all together encouraging however, due to substantial downward revisions to the first quarter reading (+1.1% from +1.8%) and fourth quarter of 2012 (+0.1% from +0.4%). A central driver of the increase in second quarter GDP and the sluggish first quarter GDP was the extent of government spending reductions. Government spending declined at a 4.2% annual rate in the first quarter vs. a 0.4% annual decrease in the second quarter. Whether this trend continues or reverts to levels seen earlier in the year will have a noteworthy impact on third quarter GDP.

July employment readings were generally downbeat, but certainly not game changing. Businesses added 162 thousand new jobs during the month, down from +188 thousand in June. In addition to the slowdown in new jobs, the average work week declined by 0.1 hour and average hourly earnings declined by 0.1%. Data from the household survey showed that the unemployment rate fell 0.2% to 7.4%. While the decline in the unemployment rate is encouraging, it was partially a result of a decline in the labor force participation rate.

The downbeat July labor report did not do much to change market expectations of Federal Reserve action at the September FOMC meeting, when many expect that QE tapering will begin. The Fed has indicated previously an unemployment rate of 7% would indicate enough improvement to warrant the end of quantitative easing. With the unemployment rate at 7.4%, the September meeting would be an opportune time to begin the process, if indeed it intends to taper its asset purchases slowly.

The pace of home price appreciation will be an important topic to watch over the near term as mortgage rates have increased along with the Fed taper discussions. The most recent S&P/Case-Schiller home price index released in July showed a strong 2.4% month over month increase and a 12.2% year over year increase. However, the release is subject to a lag and is representative of May data, largely prior to the recent material increase in mortgage rates. The extent to which the change in rates affects home prices appreciation could have an important impact on economic activity via consumer confidence and spending.

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