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Government Spending and Net Exports – 2Q2014 Trends

image6 300x183 Government Spending and Net Exports   2Q2014 Trends

Government Spending is projected to contribute enough to GDP to offset Net Exports

The numbers in Government Expenditures and Net Exports are not expected to materially impact GDP, but the higher growth rate in Imports may push their combined contributions into the red. At the moment, we will stick with our offsetting forecast of 0.0% combined contribution to 2Q2014 GDP.

The Mid-Term election year is keeping Government Spending bills stalled in Congress. We do not expect many changes, plus or minus, in government spending levels through the balance of 2014. The US is still importing more goods and services, than they are exporting, which widens the trade deficit. You can expect a combined future drain on GDP in subsequent quarters.

This is the 3rd and final Post on our estimated 2Q2014 Change in GDP before the Advance Estimate is published on July 30th. We will provide you with our last projection sometime next week, so we want to give you more of a “Sneek” Peek at June’s economic activity.

The Big 4 Leading Indicators have seen positive growth from January through May, after seeing a contraction in November and December. So, we expect June economic activity to be consistent with earlier months of 2014. However, a glimpse of the Chicago Feds National Activity Index illustrates that the US economy slowed in June. We do not believe that it will affect our model’s 2.9% forecast for 2Q2014. Here is a quick summary of CFNAI’s June activity:

  1. The broad Employment indicator has been growing these last few months,
  2. Production-related indicators slowed in June,
  3. Personal Consumption and Housing continues to be the significantly underperforming category.

It will be interesting to see Doug Short’s update to the Big 4 Leading Indicators for June, but here is a link to his July 3rd update. We have seen the battle of the Positive and Negative Twitter posts fluctuate this past month and believe it may swing to Negative this week, bringing them back to even for this quarter. We will see!

Tweet Peeks at 2Q2014 GDP for W/E 07-18-2014

@KeithEOuellette: We had rather a slow week of economic news, but what we had slanted positive during the past week. Positive and Negative news items continue to be split somewhat evenly at 39% to 35% respectively, with the range widening over the last 2-weeks; while the other 26% remained neutral. The key is to align the economic news items with the weighted average to determine their impact on GDP. We have done just that in the initial estimate of GDP growth, utilizing our simple rating model.
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You can find our First Forecast of the estimated GDP Growth Rate by clicking HERE. For an explanation of the ratings, please refer to the post describing the Rating System.
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TO DATE SUMMARY OF 2Q2014 RATINGS

POSITIVE = 39
NEUTRAL = 27
NEGATIVE = 35
As of July 18, 2014

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  • C. Kimble charted Consumer Confidence levels with Velocity of M2. Spending appears to be trending down in the future. http://t.co/dxRuS8OhLd
    RATING = <2>
  • ***************

  • The future of the Mortgage Industry with the looming risk of accelerating foreclosures is outlined in this post. http://t.co/OOC0YdwYko
    RATING = 1
  • ***************

  • Retail Sales for June came in up 0.2%, but still up between 4-5% Year-Ovr-Year for the month and 3-month rolling avg. http://t.co/EkeGmijgoJ
    RATING = 2
  • ***************

  • May Business Inventories & Sales come in with mixed results per Econintersect’s analysis of Final Business Sales. http://t.co/4GKnVHndQq
    RATING = 1
  • ***************

  • June Industrial Production comes in low at 0.2% growth mo over mo, but is up 4.3% yr over yr, unchanged from last mo. http://t.co/opqyyOw4hC
    RATING = 2
  • ***************

  • June’s Leading Economic Index marginally increased by 0.3% growth to 102.2, but slowed from May’s growth of 0.7%. http://t.co/a9Res50TYe
    RATING = 2
  • ***************
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Gross Private Domestic Investment (GPDI) – 2Q2014 Trends

image5 300x185 Gross Private Domestic Investment (GPDI)   2Q2014 Trends

GDPI

Based on April and May economic indicators, we believe that GDPI will contribute approximately 1.3% to GDP growth in 2Q2014. That is a significant change from its contraction contribution of <1.97%> in 1Q2014, and is still significantly higher than the 0.4% contributed in the 4Q2013. Let’s take a look at the tracked economic indicators for this key GPDI component.

During our 5-Year Recovery Period from the Great Recession, GPDI significantly contributed towards GDP growth and along with consumption of Durable Goods, led the way in our recovery. Today:

  1. Wholesale Sales and Inventories look solid, as well as ISM’s Non-Manufacturing Index (Services) and Industrial Production, which made a comeback in May from April’s Contraction.
  2. Small Business Confidence has been improving in recent months, but fell slightly in June.
  3. The biggest disappointment in this major component of GDP has been Construction Spending and the Residential Housing market, which have been trending up, but only slightly. In May, both these markets were relatively flat.

The good news is that Equipment Investment accounts for 38% of GDPI and appears to be growing over 10%. While on the other hand, the Investment in Residential Structures has dropped its projected growth from over 10% to 7% or so, but accounts for less than 20% of GDPI. The Change in Inventories is only expected to effect growth by 2%. Intellectual Property Products and Non-Residential Structures account for the remaining 40% of GDPI, but are only growing around 5% combined.

You may be wondering why I include Stock Market Returns, Margin Debt and Bond Market Prices in monitoring trends in GDPI. It is simply because all affect Corporate decisions concerning their investment in long-term capital projects, combined with Corporate Profits. We are seeing more and more corporations investing their excess cash into large equipment purchases, which is good news for the future.

We will soon find out whether Corporate Profits rebounded in June for the final tally of the quarter. If the majority of corporations missed their targeted earnings, all bets are off for future investments in equipment and structures in the 2nd half of 2014. The Business Cycle could be reaching its peak, and companies will again begin to conserve cash for a rainy day.

Personal Consumption Expenditures (PCE) – 2Q2014 Trends

image3 300x187 Personal Consumption Expenditures (PCE)   2Q2014 Trends

Economic Trends in PCE for April and May 2014

Based on April and May economic indicators, we believe that PCE will contribute approximately 1.6% to GDP growth in 2Q2014. That is more than double its contribution of 0.71% in 1Q2014, but much less than the 2.2% contributed in the 4Q2013. Let’s take a look at the tracked economic indicators for this key PCE component.

Real Personal Income has increased during April and May, while Real PCE has contracted during the same period. What this means is that the increased income will show up in later months as spending. But, will it? The Savings Rate has actually increased in both months, so consumers appear to be saving their increased incomes for a rainy day. Is caution in the wind for consumers?

  1. Consumer Confidence in the US Economy is usually a leading indicator for increased spending. Michigan Consumer Sentiment has been up and down over the past few months, while the Conference Board’s Consumer Confidence Index has been trending up. I believe this signals a mixed bag in regards to future consumer spending.
  2. After falling in April, Real Household Income got a bump up in May, but will it hold for the rest of the 2nd quarter? Unfortunately, growth in Retail Sales fell slightly in May, but I believe it should bounce back in June based on income trends and expected increased spending for summer vacations.
  3. Although we do not want people to be overburdened with debt, the increased Consumer Credit borrowings are actually being put right back into the economy in the form of capital or large expensive purchases.
  4. What is encouraging for the long term is the increase on the jobs front, although some believe the increase is again coming from part-time jobs, not permanent full-time jobs. Sound familiar? It should since this is exactly what Corporations did to make their record Corporation Profits over the last few years.

We need to take a closer look at the major categories of spending in the PCE component of GDP, which accounts for 69% of GDP. We will do just that after the Advance Estimate for 2Q2014 is released on July 30th. It will be a more current analysis than looking at the change in GDP from 4Q2013 and 1Q2014.

us-economy-exposed-debt-crisis

Tweet Peeks at 2Q2014 GDP for W/E 07-11-2014

@KeithEOuellette: We had rather a neutral week of news, slanting slightly negative during the past week. Positive and Negative news items continue to be split somewhat evenly at 36-38%, while the other 26% remained neutral. The key is to align the economic news items with the weighted average to determine their impact on GDP. We have done just that in the initial estimate of GDP growth, utilizing our simple rating model.
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You can find our First Forecast of the estimated GDP Growth Rate by clicking HERE. For an explanation of the ratings, please refer to the post describing the Rating System.
|

TO DATE SUMMARY OF 2Q2014 RATINGS

POSITIVE = 36
NEUTRAL = 25
NEGATIVE = 34
As of July 11, 2014

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  • Real Median Household Income rises 0.45% in May, but merely offsets the 0.42% loss in April. YOY, increase is 1.72%. http://t.co/5kst8b1nke
    RATING = 1
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  • Is there a bearish outlook for government bonds, or will a roller coaster ride take hold . . . next Financial Crisis? http://t.co/FtcqbXrJVk
    NO RATING FOR OPINIONS
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  • A deeper look into the June Jobs Report illustrates the continued trend with PT jobs & still no permanent FT jobs. http://t.co/r7FPs4aesc
    RATINGS = 1
  • ***************

  • Are we finally headed for a mid-year Stock Market correction? Maybe not! Economic news is turning more positive! http://t.co/jVxTwtApR9
    RATING = 2
  • ***************

  • ISM’s Non-Manufacturing (Services) composite falls slightly in June, but still above recessionary territory. http://t.co/kFPsoCoEy3
    RATING = 1
  • ***************

  • Mid-Year Report Card on Housing Market illustrates mortgage applications & existing home sales are down 16% & 5% YOY. http://t.co/Rl4Bm7KmJ7
    RATING = <2>
  • ***************

  • May’s JOLTS Survey predicts continued private job openings growth, which means more jobs will be filled in future. http://t.co/GtK6O1beQL
    RATINGS =2
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  • The NFIB’s Small Business Optimism Index Fell 1.6 points to 95.0 in June, below consensus estimates. http://t.co/mX5LP1cwIn
    RATING =<2>
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  • ALERT! Third time is a charm for Yellen’s chairing of the June FOMC Meeting. US Economy will be better in 2Q2014. http://t.co/AaPbNZKdKZ
    RATING = 2
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  • May Consumer Credit expands 0.1% mo-over-mo. & expands 6.7% yr-over-yr, but is up only 3.8% excluding student loans. http://t.co/2mxj2Z63kr
    RATING = 1
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