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Fed stands pat as economy and labor market slowly grow

August 02, 2013

Vanguard's Economic Week in Review

The economy continues to grow—but not easily—as indicated by the latest readings of real gross domestic product (GDP) and the job market. At its policy-making committee's recent meeting, the Federal Reserve announced no change to its "easy money" policy but seemed to suggest some unease with the pace of growth.

For the week ended August 2, 2013, the S&P 500 Index rose 1.1% to about 1,710 (for a year-to-date total return—including price change plus dividends—of about 21%). The yield on the 10-year U.S. Treasury note rose 5 basis points to 2.63% (for a year-to-date increase of 85 basis points).

Employment picture cloudy

The economy added 162,000 payroll jobs in July, less than expected, as job totals for May and June were revised downward. The private sector was responsible for nearly all of the gain. The payroll reading belies the drop in the unemployment rate, to 7.4% from 7.6%. While unemployment fell to its lowest level since December 2008, the rate fell because more people dropped out of the labor force. Average hourly earnings dipped 0.1%, while the average workweek dropped to 34.4 hours from 34.5.

U.S. employment chart

Consumer spending up, savings down

Consumer spending advanced 0.5% in June—its fastest pace since February—as consumers spent more on gasoline and automobiles. An improvement in consumer spending is a positive sign for U.S. economic growth, 70% of which is driven by household spending. Gains in personal income were more modest and disposable income stayed the same. As consumers spent slightly more than they earned, the personal savings rate declined to 4.4% compared with 4.6% in May. Consumer prices rose 0.4% in June largely because of increases in energy goods and service prices. Excluding the volatile prices of food and energy, prices rose 0.2% in June, the fastest since January.

Slow growth for GDP

Real GDP, which measures all the goods and services produced by the United States, increased 1.7% (annualized) in the second quarter, according to the Commerce Department's first of three estimates. The figure exceeded forecasts from analysts, although they considered the growth pace lethargic. The result surpassed the first quarter's 1.1% reading, which was revised downward from 1.8%. Consumer spending, which slowed, and business investment largely fueled the recent growth, while government spending decreased. A healthy advance in exports was outweighed by an even stronger rise in imports, detracting from GDP. In a comprehensive revision (stretching back to 1929) of how the government calculates GDP, the recent recession was found not to be as deep—and the recovery stronger—than originally thought. Among the changes, research and development and entertainment products are now factored into GDP and the value of pension benefit promises are counted as income.

Fed continues program, policies

In a statement from the latest meeting of the Federal Open Market Committee, the Federal Reserve's policy-setting arm, the Fed said it would continue its monthly $85 billion bond-buying program, as expected. The central bank suggested that the economy continues to need help: It slightly downgraded its view of economic growth—from "moderate" to "modest"—and noted that mortgage rates have risen. In May and June, financial markets responded negatively when Fed Chairman Ben Bernanke presented a scenario for the bond-buying program's unwinding. Analysts then expected a possible tapering off of the Fed's bond-buying program in September; however, some now expect this to happen later in the year.

Consumer confidence dips

The Conference Board's index of consumer confidence declined to 80.3 in July from 82.1. Slightly below analysts' expectations, the reading isn't far off the five-year high achieved in June, when survey results didn't reflect that month's final week of market volatility. The increase in the index's present-conditions component couldn't offset the retreat of the expectations' component. Consumers were encouraged by current labor market conditions, but their optimism shrunk somewhat when they focused on future conditions.

Compensation grows slowly

The Employment Cost Index, the broadest measure of compensation costs, increased 0.5% in the second quarter. Employment costs remained the same from the first quarter and were slightly above analysts' expectations. Salaries and wages, which compose 70% of employment costs, grew 0.4%, down from 0.5% the previous quarter. Benefits also grew 0.4%, below the first quarter's 0.6% rise. Compared with a year ago, employment costs are up 1.9%.

Manufacturing makes strides

The Institute for Supply Management's manufacturing index advanced for the second straight month, to 55.4 in July, after dipping below the index's threshold of 50 (a reading above 50 indicates growth, a reading below 50, contraction). Manufacturing climbed to its highest level since June 2011. The new orders, production, and employment components of the index all showed meaningful increases. Less dramatic were drops in inventories, new export orders, backlog orders, and prices paid.

Construction spending slips

Construction spending fell 0.6% in June, below analysts' expectations and the largest drop since January, even as May's reading was revised upwardly to 1.3% from 0.5%. Public construction and private nonresidential construction dropped, while private residential spending was unchanged. Despite the overall decline, construction spending is up 3.3% from a year ago.

Aircraft lifts factory orders

Driven by strong demand for aircraft, new factory orders climbed 1.5% in June, off of May's 3.0% pace and below analysts' expectations. Excluding transportation, new orders declined 0.4%. Nondurable-goods orders dropped 0.6%. Also, unfilled orders rose at a faster pace than in May, shipments declined after advancing slightly, and inventories received a slight bump.

The economic week ahead

Economists can relax a bit more next week with only three reports to analyze: the ISM Non-Manufacturing Index on Monday, international trade on Tuesday, and consumer credit on Wednesday.

Summary of major economic reports
Date Report Actual
expected value
10-year note yield S&P 500 Index
July 29       +3 bp –0.4%
July 30 Consumer Confidence (July)
Source: The Conference Board
80.3 81.3 +2 bp 0.0%
July 31 Employment Cost Index (2Q)
Source: Labor Department
+0.5% +0.4% –3 bp 0.0%
  Real Gross Domestic Product (2Q annual rate)
Source: Commerce Department
+1.7% +1.1%  
  FOMC Monetay Policy
Source: Federal Reserve Board
August 1 Initial Jobless Claims (week ended July 27)
Source: Labor Department
326,000 340,000 +14 bp +1.3%
  Construction Spending (June)
Source: Commerce Department
–0.6% +0.5%    
  ISM Manufacturing Index (July)
Source: Institute for Supply Management
55.4 52.0    
August 2 Unemployment Rate (July)
Source: Labor Department
7.4% 7.5% –11 bp +0.2%
  Nonfarm Payrolls (July)
Source: Labor Department
+162,000 +185,000    
  Personal Income (June)
Source: Commerce Department
+0.3% +0.4%    
  Personal Spending (June)
Source: Commerce Department
+0.5% +0.4%    
  Factory Orders (June)
Source: Commerce Department
+1.5% +2.2%    
      Weekly change +5 bp +1.1%

bp=basis points. 100 basis points equal 1%. For example, if a bond's yield rises from 5.0% to 5.5%, the increase is 50 basis points.


  • The economic statistics presented in this report are subject to revision by the agencies that issue them. For more information on the reports mentioned in this article, read our Guide to major U.S. economic reports.
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