Last Economic Blast for Summer

Here’s the good news: there is only one more important week of economic data left before Labor Day weekend -- the last blast for summer occurs this week. The bad news is that given the geopolitical events transpiring recently, the economy may eventually be the least of our problems. That said, investors have continued to take the various global conflicts in stride -- maybe a full week on the economic calendar will get them going. They'll need to shore up their energy before shutting down for August. The fun starts with the government’s first estimate of second quarter growth. After a horrible first quarter, where the economy contracted by 2.9 percent, Gross Domestic Product is expected to show an acceleration to an annualized pace of 3 to 3.5 percent. The rallying cry for the economy is quickly shifting from “2014: The year that growth returned to the US” to “2014: Here’s hoping that second half growth will save us!”

The sluggish first half growth will be front and center for the Federal Reserve, which will conduct a two-day policy meeting this week. It is widely expected that the central bank will announce another $10 billion cut to its bond-buying program, reducing monthly purchases to $25 billion. Officials are also expected to keep short-term interest rates near zero, where they have been since the height of the financial crisis in late 2008. Because there will be no press conference or Fed projections at this meeting, investors will pay close attention to the accompanying statement, which will highlight the Fed’s view on recent economic improvement and accordingly, when the central bank might raise short term interest rates (estimates are for some time in the first half of next year).

Fed Chair Janet Yellen has made clear that her perceptions of a healthy economy hinge largely on a healthy labor market. This week will also feature the July jobs report, which is expected to show continued progress. In the first half of the year, the economy has created an average of 231,000 jobs per month, putting it on track to add more jobs this year than any year since 1999. Economists predict that 225,000 jobs were created in July and that the unemployment rate will remain at 6.1 percent, the lowest level since September 2008.

Of course the labor market is more than just the unemployment rate or the number of jobs created. Whenever I write about the labor market, I receive a bunch of comments that say something like: “Sure the economy is adding jobs, but they are crappy, low-paying jobs!”  Indeed, job creation during the sluggish recovery has been skewed more towards lower wage industries, like hospitality and retail.

But the tide may be turning, according to the folks at Capital Economics, who note “the overall quality of the jobs being created is rising. Based on the mix of jobs added in each sector and the average weekly earnings within those sectors, our calculations suggest that the 1.3 million private sector jobs created in the first six months of this year paid an average of $867 a week. That’s slightly higher than the average of $843 per week that the existing 117 million private sector workers earn. The upshot is that the jobs created this year, have been of a slightly higher quality [than last year].”

Given that wage growth has been stuck at about two percent a year, just about matching the pace of inflation, it is no wonder that consumer spending has been spotty during the recovery. It is imperative to see an increase in take home pay for the average American worker, if we have any hope for a new, faster pace of economic growth to take hold in the second half of the year, and beyond.

MARKETS: Despite Friday’s sell-off on disappointing results from Amazon and Visa, earnings season has generally been better than expected. With nearly half of the S&P 500 having reported, 76 percent have beaten earnings expectations and 67 percent have reported above sales estimates, according to FactSet. Earnings growth for Q2 is growing by 6.7 percent, which is ahead of expectations for 4.9 percent growth as of June 30th. The telecom services sector is reporting the highest earnings growth for the quarter, while the Financials sector is reporting the lowest earnings growth.

  • DJIA: 16,960, down 0.8% on week, up 2.3% YTD
  • S&P 500: 1978, unchanged on week, up 7% YTD
  • NASDAQ: 4,449, up 0.4% on week, up 6.5% YTD
  • 10-Year Treasury yield: 2.47% (from 2.48% a week ago)
  • September Crude Oil: $102.09
  • August Gold: $1303.30
  • AAA Nat'l average price for gallon of regular Gas: $3.53 (from $3.65 a year ago)

THE WEEK AHEAD: In addition to the highlights mentioned above, the week ahead will feature reports on housing prices, monthly automobile sales, personal income and spending, manufacturing and consumer confidence.

Mon 7/28:

Coach, Herbalife

10:00 Pending Home Sales

10:30 Dallas Fed Activity report

Tues 7/29:

American Express, Pfizer, UPS, Twitter

9:00 Case Shiller home price index

10:00 Consumer Confidence

Federal Open Market Committee begins

Weds 7/30:

Kraft, MetLife, Whole Foods

8:15 ADP Private Jobs Report

8:30 Q2 GDP (1st estimate)

Federal Open Market Committee concludes

Thurs 7/31:

Avon, MasterCard, ExxonMobil, Conoco

8:30 Weekly Jobless Claims

10:00 Chicago PMI

Senate panel discusses results of a report on "too big to fail" banks (remember that?)

Fri 8/1:

Chevron, Clorox

Automobile Sales

8:30 July Employment Report

8:30 Personal Income and Spending

9:45 PMI Manufacturing

9:55 Consumer Sentiment

10:00 ISM Manufacturing

10:00 Construction Spending