The Week In Hindsight, 01 August 2014

The Conference Board US Consumer Confidence index reached its highest level since October 2007 during July, according to data released this week. The increase, from 86.4 to 90.9, was driven largely by an improving outlook among consumers for the jobs market, wages and the economy in general.

Despite rapid gains in confidence; the centre stage event for the week was undeniably the second quarter US GDP number which surpassed even the most optimistic of expectations. The actual reading came in at 4% on an annualised basis, against official projections for an increase of 3.1%.

In addition to higher output, the price index for Gross Domestic Purchases also increased by 1.9% on an all inclusive basis, while the ex food and energy measure saw prices rising by 1.7%.  

On a less positive note, Friday’s data showed the unemployment rate ticked up a notch in July, while monthly non-farm payrolls numbers also indicated that the pace of US jobs growth eased during the month. The actual figures in both releases were 6.2% unemployment VS projections of 6.1%, with 209,000 jobs added as opposed to the forecast of 231,000.

Although on the face of things Friday’s data appears to be a step backwards for the US economy, the general consensus is that July’s increase in unemployment was due to higher volumes of long term unemployed re-entering the workforce; leading to larger numbers of individuals being classified as actively seeking work.

This is while payrolls growth of 231,000, although lower than forecast, is substantially above the 200k level which the FOMC deems as consistent with maximum employment over the longer term.

The only real bone of contention, in our view, can be seen in July’s wage growth and personal spending figures; which once again pointed toward continuing slack in the labour market.

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Takeaway

In summary, the US economy rebounded off from earlier lows during Q2; which confirms the policy maker view that the Q1 contraction was largely due to “transitory factors”. In addition; confidence among consumers remains high, which is positive for the growth outlook heading toward the final stages of the year.

On the downside; wages continue to advance at an unsatisfactory pace, albeit at a higher rate than in other developed economies, while growth in consumer spending remains erratic.

Our takeaway from the week’s data is that a further recovery in output over H2 this year is likely. However, slower than expected growth in personal incomes, erratic consumer spending and only a tentative recovery in price pressures are likely to see the FOMC resist calls to consider raising interest rates ahead of Q2/Q3 2015.      

Consequently, we also expect equity markets to remain well supported for time being although we could see investors become more selective in terms of sector allocations toward the new year. For the week ahead the US economic data sits fairly empty, although the earnings updates are scheduled to continue coming thick and fast.

Companies reporting include AIG and Walt Disney while the ISM Non Manufacturing PMI and Trade Balance figures are the key features on the data front.

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US Dollar Index

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