Tuesday, July 22, 2014

Beware of “False Dawns” (excerpt)

The minutes of the previous FOMC meeting noted: “The information reviewed for the June 17-18 meeting indicated that real gross domestic product (GDP) had dropped significantly early in the year but that economic growth had bounced back in recent months.” In her July 15 congressional testimony, Fed Chair Janet Yellen was a bit more cautious on the outlook: “The [Q1] decline appears to have resulted mostly from transitory factors, and a number of recent indicators of production and spending suggest that growth rebounded in the second quarter, but this bears close watching.” She was particularly concerned about housing, which “has shown little recent progress.”

Yellen concluded: “Although the economy continues to improve, the recovery is not yet complete.” That’s an astonishing conclusion given that real GDP has been expanding since Q3-2009 for 19 quarters, and has been in record-high territory since Q2-2011. The average length of the six expansions since Q2-1961 was 27 quarters, excluding the short upturn from July 1980 to July 1981. Obviously, Yellen is a monetary dove and is inclined to keep interest rates near zero for much longer than most of her colleagues on the FOMC. A weaker-than-expected Q2 GDP report would favor her approach. In her testimony, she warned about the “false dawns” that tricked Fed officials in recent years.

Yellen is right to be concerned about the recent stalling of homebuilding activity. Housing starts averaged 980,000 units (saar) during Q2, up slightly from Q1’s 925,000 unit pace, but below Q4-2013’s 1.03 million units. Single-family starts have been stuck around 600,000 (saar) since the start of the year. Residential construction could be slightly negative in the next GDP report because completions of single-family homes fell from 613,000 units during Q1 to 606,000 units during Q2. Construction spending on home improvements has been surprisingly weak this year, falling 12.5% over the past five months through May.

Today's Morning Briefing: False Dawn? (1) Q2 GDP release coincides with next FOMC meeting. (2) Curbing our enthusiasm. (3) Might it be half as much as expected? (4) Beware of “false dawns.” (5) Consumer spending still leading the way higher. (6) Residential construction has stalled, while spending on home improvements is down. (7) Capital spending on equipment looking good, but not so good on structures. (8) Inventories turn from big drag to small boost. (9) Exports are up, but imports are up more. (More for subscribers.)

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