As the second quarter closes out, the U.S. economy looks strong despite a growing sense of uncertainty about trade. The Economic Policy Uncertainty Index for the U.S. increased in May. This cannot be traced back specifically to trade, it likely also reflects tax reform, changes in government spending and a widening dispersion of views by professional forecasters.
U.S. real GDP growth for the first quarter was revised down, for the second time, now showing 2.0 percent real growth. Not far from our forecast of 1.6 from April. For the nearly complete second quarter, we expect to see much stronger real GDP growth, near 4.0 percent.
The Advance Report on Trade showed that the trade gap in goods narrowed by $2.5 billion in May. This supports our view that trade was a positive for GDP growth in Q2.
Personal income increased by 0.4 percent in May, driven by job growth and wage gains. Nominal consumer spending increased by 0.2 percent, bringing the personal saving rate back up to 3.2 percent. The PCE price index increased by 0.2 percent for the month, as did the core PCE price index. Real consumer spending was therefore unchanged in May. We expect to see an increase in real consumer spending in June.
Housing data released this week was mixed. New home sales bounced back in May, increasing by 6.7 percent, to a 689,000 unit rate. This is not quite a break-out number, but it does suggest that new home sales have some upward momentum. The months’ supply of new homes for sale dropped to 5.2 months’ worth.
Existing home sales for May eased by 0.4 percent. This is by far the largest component of home sales, suggesting the overall market is still supply-constrained. The inventory of existing homes for sale ticked up to a still-tight 4.1 months’ worth.
Home prices are still increasing. According to the Case-Shiller U.S. National House Price Index, prices were up 6.6 percent in April over the previous 12 months. Western cities are leading the charge.
Mortgage applications for the week ending June 22 fell by 4.9 percent with a 5.9 percent decline in purchase apps, more than erasing the previous week’s gain. According to the Mortgage Bankers Association, the rate for a 30-year fixed-rate mortgage ticked up one basis point, to 4.84 percent.
New orders for durable goods fell by 0.6 percent in May, held down by a decline in commercial aircraft orders. The core measure, non-defense capital goods excluding aircraft, was down by 0.2 percent for the month. Total new orders for all manufactured products are running about 10 percent ahead of one year ago, not adjusted for price increases.
Initial claims for unemployment insurance increased by 9,000, to hit 227,000 for the week ending June 23. Continuing claims remain very low, falling by 21,000 for the week ending June 16, to hit 1,705,000.
We expect the Federal Reserve to leave interest rates unchanged at the next Federal Open Market Committee meeting over July 31/August 1. We look for another 25 basis point rate hike at the conclusion of the September 25/26 FOMC meeting. The CME Group says that the odds of a September rate hike are about 72 percent.
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