Data Shows Retail Gaining, but Mortgage Refinancing Slow Down

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 increase.

 

By Trust for Credit Unions Mutual Funds

 

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 increase.

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.

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Sept. 1, 2003


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