AIIS Newsletter: US Steel Market Update-July to August 2017

Falls Church, VA (AIIS) - The economy moved on from its usual first quarter doldrums to post growth of 2.6 percent during April to June, according to the Bureau of Economic Analysis (BEA).

Q1 growth has typically been a low outlier in recent years, and the economy started off 2017 with growth of just 1.2 percent. Some analysts had forecast expansion of as much as 3 percent for the second quarter, and while the economy did not quite reach that mark, 2.6 percent was still the second-highest quarterly growth in two years.

“We continue to be range-bound with growth that is pretty modest compared with history,” the chief economist at Nationwide said. “Some quarters, such as this one, were a little above it, some are a little below it, but, really, if you look at the years in total, they’re not moving much from this 2 percent growth on average.”

Consumer spending, which accounts for about 70 percent of all economic activity, grew at an annualized rate of 2.8 percent during the quarter, up from 1.2 percent during Q1, according to the BEA. Things appear to have slowed at the end of the second quarter, though, with consumer spending expanding by just 0.1 percent (non-annualized) in June.

Job growth in June came in above expectations, with 220,000 positions created, but the unemployment rate still inched up to 4.4 percent after reaching a 16-year-low of 4.3 percent in May. The labor force participation rate rose a tenth of a point to 62.8 percent in June. Ten years ago, the rate was around 66 percent, but it has dipped fairly steadily during the past decade because of both economic and structural factors – such as the retirement of baby boomers – and it has been mostly below 63 percent since late 2013.

Although the economic numbers have been lackluster, and consumer spending still has not pushed inflation up to the Federal Reserve’s target rate of 2 percent, the Federal Reserve Federal Open Market Committee, as expected, increased the target range for the federal funds rate a quarter-point to 1 to 1.25 percent at its June meeting. This marked the second time this year – and the fourth time since the Great Recession – that the Fed has raised rates.

“Information received since the Federal Open Market Committee met in May indicates that the labor market has continued to strengthen and that economic activity has been rising moderately so far this year,” the Fed stated in announcing the rate hike. “Job gains have moderated but have been solid, on average, since the beginning of the year, and the unemployment rate has declined. Household spending has picked up in recent months, and business fixed investment has continued to expand.”

Part of the reason inflation has been so low is that wage growth has stayed below its pre-recession levels. In the late-1990s and early-2000s, monthly wage growth, measured at an annualized rate, hovered around 5 percent, and from then until 2007, it was around 4 percent. But it stayed close to 2 percent from 2010 until mid-2014 and, while it has recovered somewhat since then, it has typically hovered between 3 and 3.5 percent in recent years. In June, wages increased 3.2 percent, according to the Wage Growth Tracker from the Federal Reserve Bank of Atlanta.

Housing starts in June rose 8.3 percent from May and were 2.1 percent ahead of the June 2016 total, according to the Census Bureau and the Department of Housing and Urban Development. Existing home sales, though, dipped 1.8 percent from May to June, according to the National Association of Realtors, a decline that the group’s chief economist attributed to “interested buyers … being tripped up by supply that remains stuck at a meager level and price growth that’s straining their budget.”

Car sales continue to trend well behind the 2016 pace, with July sales 13.8 percent below the same month last year and total sales through the first seven months of the year down 11.7 percent. Even light truck sales, which usually show strong growth, fell 2.5 percent in July. Year to date, however, light truck sales were still 3.5 percent ahead of the 2016 numbers.

The Conference Board’s Consumer Confidence Index rose almost four points to 121.1 in July. (The index’s baseline is 100 in 1985.) “Overall, consumers foresee the current economic expansion continuing well into the second half of this year,” the board’s director of economic indicators said.

The University of Michigan’s Index of Consumer Sentiment fell 1.7 points to 93.4 from June to July, but researchers noted that, “The relatively small decline still left the Sentiment Index higher in the first seven months of 2017 than in any other year since 2004.” As has become standard, the researchers reported very large differences between how Republicans and Democrats view the economy. They added, though, that, “Importantly, the partisan gap has narrowed in the past six months, mostly due to Republicans tempering their optimism. The recent declines among Republicans were somewhat predictable, but the maintenance of extreme pessimism among Democrats is more surprising.”

Confidence in the manufacturing sector slipped slightly in July, according to the Institute for Supply Management’s Purchasing Managers Index. The index fell 1.5 points to 56.3, which was still 3.7 points ahead of where it was in July 2016. (Any rating over 50 indicates growth in the manufacturing sector.) Of 18 industries surveyed, 15 reported growth.

The Dow Jones Industrial Average ended July at a record high of 21,891.12, while the S&P 500 Index finished the month at 2,470.30, about 7 points off its record close of five days earlier.

The dollar lost a little value in mid-summer, but, on July 31, was still trading at 0.85 euros, 0.76 pounds, 110.43 yen and 6.73 yuan.

Business and consumer confidence remain high, and the Dow Jones is up about 10.5 percent since the start of the year and about 17.5 percent since Election Day. President Donald Trump has made some pro-growth moves – such as pulling back on regulations – but the businessman’s panacea that some expected from the GOP having control of the House and the Senate with a Republican in the White House has not yet emerged. The list of legislative accomplishments this year is short, while the to-do list remains long. Now that Republicans in Congress appear to have abandoned their effort to repeal and replace the Affordable Care Act – a project on which they spent much of the first half of the year – that may change. Tax reform is likely up next, and if done correctly, this could give the economy a significant boost. Optimism about the economy continues to be tempered, though, by the Trump administration’s short sightedness on trade. Though the Department of Commerce has not yet completed its Section 232 investigation of steel imports, the White House seems determined to impose additional restrictions on the steel trade, a move that would undermine Trump’s goal of posting 3-4 percent growth a year. That campaign promise would not survive a trade war.

Courtesy: AIIS