This economic update was written & provided
by Goldman Sachs & Co.
Although data on US economic activity has been sparse in recent
days, the information that has come to light reinforces earlier
signs of a strengthening expansion. For example, consumer spending
appears to be picking up in response to the federal tax cut, judging
from weekly indexes of retail activity. Although these indexes are
limited in their reliability, due to volatility and coverage, both
have moved into distinctly positive territory in July. In the first
three weeks of July, the BTM-USBW index was 1.4% above its June
average; the Johnson Redbook data show a comparable 1% month-do-date
New orders for durable goods rose 2.1% in June, with bookings for
nondefense capital equipment other than aircraft-a key that business
spending indicators are edging up 0.6%. In both cases, gains came
on top of upward revisions to May data. Although the markets tend
to focus on new orders, in our view backlogs provide the better
read on future production. Recent trends point to some improvement
in US output, regarding an increase in hard goods overall, particularly
business equipment. Even the labor market is showing tangible signs
of improvement. In the week that ended July 19, initial claims for
jobless benefits dropped to 386,000-the first sub 400,000 reading
since early February. This pulled the four-week average down below
420,000 for the first time in over four months. With continuing
claims also receding, payroll employment has the opportunity to
register its first gain since January.
On the other hand, the sharp increase in long-term yields has already
tapped on the brakes of recovery. Yields on 10-year government securities
are about 100 basis points above the level that they were at just
six weeks ago. With that jump and with mortgage rates following
suit, the Mortgage Bankers Association's index of home refinancing
applications has retreated sharply from its mid-June record-level
high. It is far too soon to ring the closing bell on refinancing,
since applications are still quite large in the full historical
context. However, the sharp swings of recent weeks underscore the
potential for interest rate pressures to constrain growth and, by
extension, the likely probability that these pressures could also
not last for long.
For a live summary of Goldman's latest economic assessment, sign
up for this week's second
quarter trendwatch call.
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