Hooray, we are still in the soft patch! That seemed to be the stock market’s reaction to yesterday’s personal income and consumption report for July. The 0.8% increase in personal consumption expenditures (PCE), which beat expectations, was led by a 10.0% increase in spending on new cars and a 5.2% increase in spending on household utilities. Excluding these two categories, spending rose 0.5%. It’s also up 0.5% excluding gasoline sales. Proponents of the soft patch scenario, including yours truly, anticipated that auto production and sales would improve right about now as Japanese car parts became more available following the disruptions caused by Japan’s earthquake.
At the start of this month, real GDP growth reports for the US, the UK, Germany, and France during Q2 all were disappointingly close to zero. The plunge in stock prices during the first four weeks of the month suggested that investors no longer believed that the soft patch would be followed by better growth, but rather by a recession. We also gave up on better growth during Q4, but we remain in the soft patch camp.
There has been no soft patch in capital spending. That’s because capital spending is driven by corporate profits, which have been very strong, as discussed in yesterday’s Morning Briefing. Indeed, while Q2 real GDP growth was revised downwards slightly from 1.3% to 1.0% (saar), nonresidential fixed investment was revised upwards from 6.3% to 9.9%. Spending on equipment and software was revised higher from 5.7% to 7.9%, and structures rose 15.7% rather than the preliminary estimate of 8.1%. During July, nondefense capital goods shipments rose for the third straight month, up 0.2% and 12.9% over the past three months, at an annual rate. That’s the best pace in a year.