Those hoping for the US economy to accelerate in the second half - and many economists made that call early in the year - will be disappointed. While employment metrics seem to show steady improvements, putting the Fed on the "taper path", the economy is facing some increasing headwinds. Here are four indicators signaling a tough road ahead.
1. The rate of improvement in the housing sector is slowing. Weak new home sales number was the first indication that not all is well with US housing (discussed here), but now home price increases (HPI) have leveled off. This trend may actually take MBS off the table for the Fed's taper, leaving the central bank to focus on cutting back only the treasury purchases.
|Source: TD Economics|
TD Economics: - To make matters worse, the rapid recovery in the housing market seems to have hit a snag. Rapidly rising mortgage rates resulting from taper-talk may already be showing up. Both new and pending home sales have declined in July. Moreover, measures of home price growth failed to accelerate in June, although it remains unclear whether due to higher rates or increasing inventory of properties for sale.2. Personal income growth remains weak.
NY Times: - After rising 0.3 percent in June, income was held back in part by steep government spending cuts that reduced federal workers’ salaries. Overall wages and salaries tumbled $21.8 billion from June, with a third of the decline coming from forced furloughs of federal workers.3. Growth in consumer spending (which represents over 70% of the GDP) has slowed as well.
WSJ: - A paltry increase in consumer spending in July showed the U.S. economy starting the second half of the year on a bumpy path, creating another risk to growth along with overseas turmoil and Washington budget battles.4. As discussed earlier (see post), consumer confidence has peaked in the second quarter and has been declining steadily since. What's particularly troubling is that according to Gallup polling right before this weekend, economic confidence index suddenly dove to the lowest level since the sequester went into effect in March. The uncertainty related to the Syrian crisis and potential US military involvement is one potential explanation.
U.S. personal spending on everything from cars to clothing rose a mild 0.1% in July from a month earlier, the weakest since April, the Commerce Department said Friday. Overall incomes improved slightly, but wages and salaries fell 0.3%, pushed down by federal spending cuts that spurred furloughs across the government.
Americans' willingness to open their wallets has been a key driver of the recovery for years, despite still-high unemployment and stagnant wages. Better-than-expected growth in the second quarter—the economy expanded at a 2.5% annualized pace—was largely due to strong consumer spending, which represents more than two-thirds of demand in the U.S. economy.
But the latest data showed that consumers entered the third quarter with a thud.
Add to this the potential shock associated with another fiscal showdown brewing in Washington and we are looking at subpar growth in the United States in the second half of the year.
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