- Economic growth was revised to show a smaller decline
- Consumer spending decelerated; housing sales fell.
- Consumer sentiment improves on historically low unemployment and ebbing inflation.
Economic growth declined less than initially estimated, and consumer spending was revised up. The job market remains strong, but the housing market is in decline.
The drop in real GDP in the second quarter was revised to a smaller 0.6% decline from an original estimate of a 0.9% decline as consumer spending was revised up. Consumer spending growth slowed in July as inflation also ebbed. Both nominal and real spending increased. Income growth slowed, but employee compensation growth was strong.
New and pending home sales declined again in July. Total home sales were down 6.6% in July and down 21% from a year ago.
Consumer sentiment improved in August as inflation declined, gas prices fell, and the job market remained robust. Initial and continuing jobless claims declined in the latest data and remain low by historical standards.
GDP revised: The decline in second-quarter real GDP was revised to an annualized decline of 0.6% in the second estimate from the initially estimated 0.9% decline.
Personal consumption was revised up to an increase of 1.5% from the original estimate of 1.0%. Spending on goods was revised to a decline of 2.4% compared to the 4.4% decline first estimated. Spending on services was revised down to a gain of 3.6% from the originally estimated gain of 4.1%. Gross private investment was revised to a decline of 13.2% from an original estimate of 13.5%.
The upward revision caused real GDP growth year-over-year to increase to 1.7% from the 1.6% initially estimated.
Spending growth slows: Consumer spending growth decelerated in July and was weaker than expected, with nominal growth of 0.1% from a downwardly revised increase of 1.0% in June.
Personal income growth also slowed to 0.2% from an upwardly revised 0.7% in July. Employee compensation growth accelerated to 0.8% in July, and government transfer payments declined. Proprietors’ income growth also declined.
Spending on durable goods increased 1.3% in July, spending on nondurable goods declined 1.0%, and spending on services increased 0.3%. Spending on motor vehicles and parts increased 1.1%, following a 2.1% increase in June.
The personal savings rate was unchanged at 5% and remained at the lowest level in nearly 14 years. The Personal Consumption Expenditure Index (PCE), the key gauge of inflation that the Fed follows, declined 0.1% in July, which was down from an increase of 1.0% in June and was smaller than the 0.0% consensus estimate.
Overall price inflation, according to the PCE, decelerated to 6.3% in July compared with a year ago from 6.8% in June, while the core inflation rate declined to 4.6% from 4.8% in June. Factoring in inflation, real spending increased 0.2% in July.
Housing market suffers: New home sales, based on new contracts signed on newly constructed homes, declined much more than expected in July, and June sales were also revised down.
New home sales at an annualized pace of 511,000 were down 29.6% from a year ago. Compared to July 2019, new home sales were down 24.2%. New home inventory increased 3.1% from June and was up 28.2% from a year ago. New-home supply increased to 10.9 months, which is about 50% higher than what is considered normal.
In July, 32% of the new homes sold were homes not yet started, while 39% were under construction, and 28% were completed units.
With the decline in both new and existing home sales in July, total home sales were down 6.6% for the month and down 21.2% from a year ago. Pending home sales, which are new contracts signed on existing homes, declined less than expected, with a 1.0% drop in July from June when a decline of 2.6% had been expected. With the decline, pending sales were down 22.5% from a year ago.
Jobless claims drop: Seasonally adjusted initial jobless claims declined by 2,000 to 243,000 for the week ending August 20. Non-seasonally adjusted claims fell by 3,000. Both measures had been increasing this summer but are now decreasing again.
The nonseasonal number remains lower than at the beginning of 2020 before the pandemic began. Continuing claims, which represent people who previously filed and remain on traditional unemployment compensation, declined by 19,000 from the previous week, bringing the total down to 1.42 million as of the week ending August 13. That level of continuing claims was 348,000 lower than before the pandemic.
The broadest measure of continuing claims declined by 33,000 to 1.45 million in the latest data, which lags the traditional number and is not seasonally adjusted. That total measure is down 28,000 over the last four weeks and is 654,000 lower than the pre-pandemic level.
Consumer sentiment improves: Consumer sentiment has increased in August, according to several measures, but improvement has softened more recently. The consumer sentiment index from the University of Michigan increased 13% from July as it recovered from an all-time low in June.
Sentiment measures are sensitive to inflationary pressures and stock market change, so August has seen continued improvement in inflation but more volatility in stock prices. Inflation expectations declined for the next year to 4.8% from 5.2% in July, and expectations for inflation in five to 10 years held steady at 2.9%.
The Morning Consult daily index has increased 4.1% so far in August as gas prices are down 23% from the peak in June, but the daily index was higher five days ago before recent stock volatility.
JOIN US: The Q3 Cox Automotive Industry Insights and Forecast Call will be held on Wednesday, September 28. Jonathan Smoke and the Industry Insights team will host a conference call to review industry performance in the third quarter and what is expected for the remainder of the year. RSVP to attend.
Jonathan Smoke is chief economist at Cox Automotive.