Yesterday's GDP Report, Well, Stunk

From the NY Times:

The weak performance reflected the increasingly thrifty inclinations of American consumers in the face of plummeting real estate prices, tightening credit and a deteriorating job market. Economic growth was also hampered by a continued pullback in construction and business investment.

The only factors preventing the economy from sliding backward were the growth of American exports — aided by a weakening dollar — and a buildup of inventories by businesses.

Gross Private domestic investment decreased 4.7%, with fixed investment (think real estate) dropping 9.7%. Residential turned in another dismal quarter with a drop of 26.7%. However, non-residential also dropped, coming in at -2.5%. This is the first decrease since the fourth quarter of 2006 and that figure was out of place as well. In other words, it's been a long time since nonresidential figures were negative.

Consumer spending increased 1%. Spending on durable goods decreased 6.1% and spending on non-durable goods decreased 1.3%. Services increased 3.4% -- a very high number in this series indicating we probably won't see growth in this area at this level for the next few quarters. This is an incredibly big issue going forward. Consumer spending accounts for 70% of US GDP. When the consumer stops spending, the US stops growing.

Exports increased 5.5% and imports decreased 2.5%. That's about the only good news here.

Short version -- this report stinks and points to serious trouble ahead. There's no good news here.

A Deeper Look at CPI or Why the Federal Reserve is Out-Of-Touch

From Bloomberg:

Prices paid by U.S. consumers rose more than forecast in September as food and energy costs climbed, while core measures showed inflation remains contained.

The 0.3 percent increase followed a 0.1 percent decline in August prompted by falling oil prices, the Labor Department said today in Washington. So-called core producer prices, which exclude fuel and food costs, rose 0.2 percent for a second month in line with forecasts.

With inflation under control, Federal Reserve policy makers have leeway to consider cutting their benchmark rate again later this month to keep the economy growing in the face of a deepening housing recession. Fed Chairman Ben S. Bernanke this week reiterated the central bank would ``act as needed'' to foster sustainable growth along with price stability.

``A slower economy and additional slack in the labor market should help keep inflation under control,'' Ethan Harris, chief economist at Lehman Brothers Holdings Inc. in New York, said before the report. ``Tame inflation and weaker growth imply additional rate cuts.''

Economists had forecast consumer prices would rise 0.2 percent after a 0.1 percent decline the prior month, according to the median of 82 projections in a Bloomberg News survey. Estimates of the increase ranged from no change to a 0.5 percent gain.

Let's ignore the headline number and look at the following two paragraphs from the BLS release:

Consumer prices increased at a seasonally adjusted annual rate (SAAR) of 1.0 percent in the third quarter of 2007, following increases in the first and second quarters at annual rates of 4.7 and 5.2 percent, respectively. This brings the year-to-date annual rate to 3.6 percent and compares with an increase of 2.5 percent for all of 2006. The index for energy, which advanced at annual rates of 22.9 and 32.9 percent in the first two quarters, declined at a 14.8 percent rate in the third quarter of 2007. Thus far this year, energy costs have risen at an 11.7 percent SAAR after increasing 2.9 percent in all of 2006. In the first nine months of 2007, petroleum-based energy costs (energy commodities) advanced at a 20.6 percent rate and charges for energy services (gas and electricity) increased at a 1.3 percent rate. The food index rose at a 5.7 percent SAAR in the first nine months of 2007 after advancing 2.1 percent in all of 2006. Grocery store food prices increased at a 6.7 percent annual rate in the first nine months of 2007, reflecting acceleration over the last year in each of the six major groups. These increases ranged from annual rates of 4.0 percent in the index for other food at home to 17.7 percent in the index for dairy products.

The CPI-U excluding food and energy advanced at a 2.5 percent SAAR in the third quarter, following increases at rates of 2.3 percent in each of the first two quarters of 2007. The advance at a 2.3 percent SAAR for the first nine months of 2007 compares with a 2.6 percent rise in all of 2006. The deceleration largely reflects a smaller increase in the index for shelter and a downturn in the index for apparel. Shelter costs, which rose 4.2 percent in all of 2006, have risen at a 3.2 percent annual rate in the first nine months of 2007. The index for apparel, which last year registered its first annual increase since 1997, has declined at an annual rate of 1.7 percent thus far in 2007. The annual rates for selected groups for the last seven and three-quarter years are shown below.

So -- why am I focusing on these two paragraphs rather than the headline number? I am personally having a really difficult time believing the "headline" inflation number largely because my personal experience just isn't jibing with an "inflation is benign" scenario. Here's why. I go shopping every 4-5 days. Over the last year or so I have seen chicken increase from about $4-$5 to $7-$8. Milk is now almost $4/gallon when it use to be $2.99/gallon. Simply put, the numbers just aren't adding up. While I don't know what is wrong exactly with the BLS' calculations and/or methodology, it simply isn't tracking what I am seeing at the retail level. Now I realize that the prices above are for food which isn't part of "core" inflation. This also illustrates how incredibly stupid the Fed's reliance on "core" inflation is. Core inflation is a great measure if you don't consume food or energy. For that small minority of the population that actually does consume food and energy, total inflation is a hell of a lot more relevant to daily life.

Let's look at three sentences from the first indented paragraph from the BLS report:

This brings the year-to-date annual rate [of total consumer prices] to 3.6 percent and compares with an increase of 2.5 percent for all of 2006.

Thus far this year, energy costs have risen at an 11.7 percent SAAR after increasing 2.9 percent in all of 2006.

Grocery store food prices increased at a 6.7 percent annual rate in the first nine months of 2007, reflecting acceleration over the last year in each of the six major groups.

These three sentences -- which are part of the BLS report -- are not reported in the financial press. And they sure should be because they show some serious price acceleration for goods we have to buy in modern society.

Retail Sales Up .6%

From Bloomberg:

Retail sales in the U.S. increased more than forecast in September, a sign that consumers will help the economy avoid a recession even as the housing slump deepens.

The 0.6 percent increase followed a 0.3 percent gain the prior month, the Commerce Department said today in Washington. Purchases excluding automobiles rose 0.4 percent.

The report will ease concern the collapse in housing and a decline in consumer confidence will cause spending, which accounts for more than two-thirds of the economy, to retrench. Gains in jobs and wages are giving Americans the means to weather lower home values and reduced access to credit, economists said. Treasuries dropped after the release.

Here are the tables from the Census Bureau

The underlying growth is a lumpy:

Gasoline sales were up 2%. Health was up 1%. Electronics and appliances were up .9%.

Regarding the increase in gas sales, remember that gas prices are higher now than they were a year ago.



CNBC noted:

Sales at gasoline stations also rose strongly in September, up 2 percent following a 2.6 percent drop in August. However, this increase primarily reflected the fact that pump prices were rising last month after having declined the previous month.

But general merchandise was down .1%, department stores were down .5%, and miscellaneous store retailers were down 1.3%.

The big news came from the auto sales, which increased 1.2%.

Trade Deficit Improves -- Exports Hit Record

From the AP

The Commerce Department reported that the trade deficit declined to $57.6 billion in August, down 2.4 percent from the July imbalance. It was the lowest gap between exports and imports since January and a much better showing than had been expected.

The improvement reflected a 0.4 percent rise in exports, which climbed to a record $138.3 billion, as the decline in the value of the dollar against many other foreign currencies boosted sales of American farm products, industrial supplies and consumer goods to all-time highs.

This is good news and demonstrates one good side effect of the falling dollars.

Payrolls Increase 110,000

From the BLS:

Employment rose in September, and the unemployment rate was essentially unchanged at 4.7 percent, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. Nonfarm payroll employment rose by 110,000 following increases of 93,000 in July and 89,000 in August (as revised). In September, health care, food services, and professional and technical services continued to add jobs, while employment trended down in manufacturing and construction.Average hourly earnings rose by 7 cents, or 0.4 percent.

However, last months' loss was revised to a gain:

Payrolls grew by 110,000 after an 89,000 increase in August, the Labor Department said today in Washington. Revisions added 118,000 workers to payroll figures previously reported for July and August.

The devil's in the details, so let's see what the inside story of this number is.

Construction: -14,000
Manufacturing: -18,000

This shouldn't surprise anyone. The housing sector has been dropping like a stone for the last year. While commercial construction has helped to absorb the displaced workers, that will eventually only go so far. It looks like we are at the point.

As for manufacturing, the main issue here is the productivity increases we have seen over this expansion. Although exports continue to rise, this is occurring with fewer and fewer workers.

Education/health: 44,000
Leisure: 35,000
Government: 37,000

71.81% of the jobs created (44,000 + 35,000) were lower paying. In addition, when we take government out of the equation (which gives us 73,000 total), pretty much the majority of jobs created is lower paying.

Personally, I'm unimpressed by these numbers.

However, the upward revision to last month's numbers plus this months headline number will probably give the market some upward momentum.

Factory Orders Drop

From Bloomberg:

Orders placed with U.S. factories fell in August by the most in seven months, raising concern the turmoil in credit markets eroded business confidence.

Bookings declined a greater-than-forecast 3.3 percent after a revised 3.4 percent gain in July that was smaller than previously estimated, the Commerce Department said today in Washington. Excluding transportation equipment such as cars and airplanes, demand declined 1.7 percent after a 1.7 percent gain.

The figures suggest business investment will slow in the second half of the year as a worsening housing recession hurts consumer spending. Economists project Federal Reserve policy makers will lower interest rates again to prevent economic growth from stalling.

``The volatility in financial markets in recent months probably introduced an element of caution in ordering,'' said Michael Moran, chief economist at Daiwa Securities America Inc. in New York.

This news shouldn't be that surprising considering the credit markets over the last few months. The real concern is what will happen over the next few months. If we see this trend continue, then we have a problem.

Mortgage/Financial Lay-Offs Continue

From the WSJ:

Morgan Stanley said it is firing about 600 employees in its residential-mortgage businesses. The cuts, which primarily affect sales and administrative staff, account for about one-fourth of the New York investment bank's home-lending work force, said a person familiar with the plan. Morgan Stanley, which last year paid $706 million to buy mortgage-lending and servicing firm Saxon Capital, said about 500 people will be fired at its three mortgage units in the U.S. and about 90 at Advantage, its United Kingdom home-lending unit.

........

Zurich-based Credit Suisse will cut 170 positions. Last month it cut about 150 residential-mortgage jobs. Most of the latest cuts will be made in the commercial-mortgage-backed securities area, a spokeswoman for the bank said. "In the current market environment, we have made targeted reductions to adjust our capacity to meet diminished client demand," the bank said in a statement.

The announcements follow layoffs of hundreds of residential-mortgage employees at other securities firms and likely presage even broader cutbacks at many investment and commercial banks. (Meanwhile, Countrywide Financial Corp., the nation's biggest home-mortgage lender, has launched a campaign to shore up its image.

Financial service jobs have performed well during this expansion. Here is the chart of financial service jobs from the BLS. It goes back to 2001:



However, there have been a ton of lay-offs since the mortgage mess started to worsen at the end of last year. According to the mortgage lender Implode-o-meter 161 major US lending operations have "imploded". Yet over this time, financial service jobs have continued to increase. How long can that trend last in the current environment?

Consumer Spending Increases

From the BEA:

Personal income increased $40.2 billion, or 0.3 percent, and disposable personal income (DPI)increased $37.2 billion, or 0.4 percent, in August, according to the Bureau of Economic Analysis. Personal consumption expenditures (PCE) increased $54.8 billion, or 0.6 percent. In July, personal income increased $61.5 billion, or 0.5 percent, DPI increased $60.3 billion, or 0.6 percent, and PCE increased $37.3 billion, or 0.4 percent, based on revised estimates.

From Bloomberg:

Consumer spending in the U.S. rose more than forecast in August, a sign the fallout from a weaker job market and collapse in subprime lending has yet to reach the biggest part of the economy.

The 0.6 percent rise in spending was the biggest in four months and followed a 0.4 percent increase in July, the Commerce Department said today in Washington. The Federal Reserve's preferred measure of inflation cooled.

Lower gasoline prices, auto-dealer discounts and a jump in air-conditioning use during last month's hot spell lifted demand, economists said. Smaller price increases give Fed policy makers room to reduce interest rates again should job losses and declines in home values lead to a deeper slowdown.

``Consumers were out in force in August even though we had the credit crunch'' mid month, said Chris Rupkey, senior financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York, who correctly forecast the gain in spending. ``Inflation is behaving quite well.''

Here is a chart of chained (inflation-adjusted) personal consumption expenditures.



Here is a chart of the month-to-month percent change in the chained dollar figures



The big reason for the jump was a 2.8% increase (in chained 2000 dollars) of durable goods. However, this figure has been jumping around quite a bit:



In general, these are very good numbers. Last month's increase was good and this month's increase is better. However, I would caution that the big jump is from durable goods. Considering these are usually more expensive items that require financing, we need to look with caution to next month's numbers.

Durable Goods Orders Decrease 4.9%

From the Census Bureau:

New orders for manufactured durable goods in August decreased $11.3 billion or 4.9 percent to $219.5 billion, the U.S. Census Bureau announced today. This decrease followed two consecutive monthly increases, including a 6.1 percent July increase. Excluding transportation, new orders decreased 1.8 percent. Excluding defense, new orders decreased 5.9 percent.

Here is a chart that shows both the monthly increases and decreases and the year-over-year change.



There are some interesting numbers in the report.

The last report had a 6.1% increase -- 3.4% without transportation. So this decrease isn't as big as it looks on the surface. It's more of a natural slowing down from a big month.

Total new orders are up 1.7% from last year. But total new orders without transportation is down (-.1%). That means that without transportation capital goods new orders would be down for the year. That is cause for concern, especially for economists who argue that exports and the cheap dollar will keep us out of a recession. Transportation accounts for 30% of durable goods new orders. This means that 70% of the durable goods producers are at last years level.

Motor vehicle new orders are down 4.5% from last year.

PPI -1.4%, core up .2%

From the BLS:

The Producer Price Index for Finished Goods fell 1.4 percent in August, seasonally adjusted, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. This decrease followed a 0.6-percent increase in July and a 0.2-percent decline in June. At the earlier stages of processing, prices received by manufacturers of intermediate goods moved down 1.2 percent in August compared with a 0.6-percent advance in July, and the crude goods index dropped 3.0 percent after climbing 1.2 percent in the prior month. (See table A.)

According to the report, energy prices dropped 6.6% and food prices dropped .2%. The change in finished goods increased (unadjusted) 2.2% from a year ago, which is the slowest increase since January of this year.

I assume the Fed has advance information on the economy and economic statistics. I have no basis for this belief, other than they are the Governors of the Federal Reserve and they are therefore entitled to advanced information. That being said, I am assuming the Fed has this information awhile ago. This news gives them more wiggle room regarding interest rates. However, until their latest statement about the discount rate, they have continually stated in their policy statements that inflation is still a concern. So they'll have to either backtrack on that observation or continue to argue the threat to long-term growth is more important.

Empire State Drops But Still Positive

From the NY Fed:

The Empire State Manufacturing Survey indicates that conditions for New York manufacturers continued to improve in September, but at a slower pace than in the past few months. The general business conditions index fell to 14.7.

The new orders index dropped, while the shipments index declined sharply. The prices paid index, although elevated, held steady, as the prices received index rose several points. The number of employees index inched upward. Future indexes conveyed continued optimism, with the future shipments index increasing notably. The capital expenditures index fell for a second consecutive month.

This report jibes with the latest national Fed survey on industrial production:

Industrial production rose 0.2 percent in August after an increase of 0.5 percent in July. At 114.4 percent of its 2002 average, total industrial production in August was 1.7 percent above its year-earlier level. Manufacturing output fell 0.3 percent in August after five consecutive months of increases, mining output dropped 0.6 percent, but unusually hot weather contributed to an increase of 5.3 percent in the output of utilities.

....

The production of consumer goods edged up 0.1 percent in August. The production of durable consumer goods decreased 1.0 percent; the drop was due mainly to a reduction of 2.1 percent in the output of automotive products. Elsewhere, the output of home electronics declined 0.2 percent; the output of appliances, furniture, and carpeting fell 0.6 percent; but the index for miscellaneous durable goods rose 0.2 percent. The production of nondurable non-energy consumer goods fell 0.3 percent; decreases in the production of foods and tobacco, of clothing, and of paper products more than offset an increase in the production of consumer chemical products. Boosted by residential sales of electricity, the index for consumer energy goods rose 3.5 percent.

The index for business equipment fell 0.2 percent in August. The output of transit equipment declined 0.2 percent, as a reduction in motor vehicle assemblies more than offset an increase in the production of civilian aircraft. The index for industrial and other equipment decreased 0.6 percent; although farm machinery increased for the second month in a row, other machinery categories registered declines. The production of defense and space equipment fell 0.6 percent.

The index for construction supplies stayed flat in August. The index for business supplies rose 1.0 percent as a result of an increase in the commercial sales of electricity; the output of non-energy business supplies was unchanged.

The production of materials rose 0.2 percent in August. Within non-energy materials, the index for durable materials fell 0.2 percent, and the index for nondurable materials fell 0.1 percent. The decrease in durable materials reflected reduced output of motor vehicle parts as well as decreases in a variety of equipment parts. Among nondurable materials, declines in the output of textiles and of chemicals more than offset an increase in the production of paper. The output of energy materials climbed 1.5 percent.

The key to these reports is from the Fed's Industrial Production report: Manufacturing output fell 0.3 percent in August after five consecutive months of increases. In addition, the Empire State Index is still at an expansionary level. My guess is we're simply seeing a natural drop after some increases.

Remember that exports are doing very well. They increased smartly in the latest report and the dollar makes exports very competitive internationally. I wouldn't expect this number to radically drop in the near future so long as the international economic scenario remains fairly strong.

Retail Sales Disappoint

From Marketwatch:

U.S. retail sales increased a healthy 0.3% in August, but all the gains were for cars and trucks, the Commerce Department said Friday.

Excluding motor vehicles, sales fell a disappointing 0.4%, below expectations, and the biggest decline since last September.

Sales were slightly weaker than expected, but the upward revision to July's sales figures to 0.5% put the level of sales near expectations. Economists surveyed by MarketWatch had expected total sales to rise 0.6%, with a 0.2% increase in sales excluding autos. See Economic Calendar.

Sales were tepid outside of autos, although furniture and electronics sales showed some life. Sales at the malls, grocery stores, restaurants, and garden centers were weak.

From CNBC:

Sales at U.S. retailers rose a smaller-than-expected 0.3% in August and they recorded the biggest decline in almost a year when car sales were stripped out, a government report showed on Friday.

Excluding motor vehicles and parts, retail sales fell 0.4% last month, the sharpest drop since September 2006, the Commerce Department said.

Analysts polled by Reuters were expecting sales to gain 0.4% and to rise 0.2% when cars and parts were stripped out.

Retail sales excluding cars, parts and gasoline, fell 0.1%, the steepest decline since April.

So-called core retail sales -- which exclude cars, gasoline and building materials -- were unchanged in August after a 0.8% gain in July.

Here's a link to the Census Report.

The report has a several very revealing categories.

First, total retail sales for the the period of 06/07 - 08/07 (the latest three month period) only increased .6% from the the 03/07 to 05/07 period. This is a rolling three month indicator. For the same period, total sales ex-autos rose 1.2%. This indicates auto sales are a big drag right now. In fact, for the same set of three month periods, auto sales are down 1.9%.

Looking at the year over year changes, let's first get the implicit GDP price deflator. According to the BEA, the GDP price level was 116.347 in the second quarter of 2006 and 119.532 for the second quarter of 2007. That's an increase of 2.73%.

Non-adjusted

Total retail sales increased 3.7%.
Retail Sales Ex-Autos increased 3.9%

Adjusted

Total Retail: about 1%
Total Retail Less Autos about 1.2%.

These are not impressive numbers.

Trade Deficit Narrows Slightly; Exports Jump

From Marketwatch:

Exports increased 2.7% in nominal terms to $137.7 billion, while imports increased 1.8% to $196.9 billion. Much of the increase in imports was due to higher prices, especially for petroleum and food. The average price of imported crude petroleum was the second highest on record at $65.56 per barrel.

In inflation-adjusted terms, imports of goods rose 0.8%. Inflation-adjusted exports of goods rose 3.7%.

U.S. producers exported record values of capital goods, consumer goods, autos and foods. U.S. consumers imported record values of foods and feeds.

Here's a graph of US exports from the beginning of the year. This is a nice graph. It shows where some of the strength in the underlying economy is.



I would love to see some analysis about the impact of the declining dollar on this number. Here's the weekly chart from stockcharts of the US dollar index.

Employment Report Stinks

From the BLS:

Nonfarm payroll employment was essentially unchanged (-4,000) in August, and the unemployment rate remained at 4.6 percent, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. Over the last 3 months, total payroll employment changes have averaged 44,000 per month and private sector employment changes have averaged 72,000 per month (as revised). In August, employment in manufacturing, construction, and local government education declined, while job growth continued in health care and food services.

The details aren't very good.

First,

Manufacturing employment declined by 46,000 in August. This industry has lost 215,000 jobs over the past year. In August, declines were widespread among component industries. Within durable goods, there were job losses in motor vehicles and parts (-11,000), machinery (-7,000), wood products (-7,000),furniture and related products (-4,000), and semiconductors and electroniccomponents (-4,000). In nondurable goods manufacturing, job losses continued in apparel (-4,000) and in textile mills (-2,000).

In addition,

Construction employment declined in August (-22,000), with most of the loss occurring among residential specialty trade contractors. Since its most recent peak in September 2006, construction employment has fallen by 96,000.

"Blue collar" employment isn't doing very well. Manufacturing has been shedding jobs for the last year, and the decline in construction employment indicates the housing slowdown is finally translating into job losses.

In addition, gains were in low-paying sectors. Education and health services added 63,000 jobs, and "leisure and hospitality" (read, "do you want fries with that?") added 12,000. These lower paying sectors are where job growth was strongest.

Yesterday, Bob Pisani wrote the following on his blog:

The jobs report. This leaves tomorrow jobs data as the key economic report before the Fed meeting September 18th. There have been some signs of weakness in the employment trends recently. Very strong data will clearly reduce the chances of a cut; very weak data will revive the belief a cut is imminent. The worst case scenario for the stock market is a jobs report that is in line or just slightly below expectations; this will leave traders confused about the Fed's intentions and put more weight on the weekly jobless claim numbers.

I think Pisani is correct in his analysis here. This number is clearly negative and all really ups the probability of a rate cut at the next Fed meeting.

ADP Employment Report Shows Weak Job Growth

From CBS.Marketwatch

Employment in the U.S. private sector grew by 38,000 in August, the weakest in four years, according to the ADP employment report released Wednesday.

The ADP report suggests nonfarm payrolls may have grown much slower than the 120,000 anticipated by economists. See Economic Calendar.

It was the second straight weak reading in the ADP index; July's reading was revised lower to 41,000 from 48,000 initially reported.

"A deceleration of employment may be under way," ADP said in a release.

First, there is some debate about the accuracy of both the BLS data and ADP data. The BLS data has to deal with the birth/death model adjustments, and the ADP data is a fairly new statistic that is still getting the kinks out.

That being said, this is not the news the economy wants to hear. However, it does play into the bad news = good news because it adds to the possibility of a Fed rate cut at the September meeting.

We'll know more with the Beige Book's release later today.

I've looked at several employment areas that will probably be the first to show weakness here

More On Employment

From Mish:

Now that housing is dead I keep asking "what is the next big source of jobs?" No one has yet come up with an answer.

It clearly is not Wall Street, financials, credit card growth, consumer spending, retail, commercial loans, leveraged buyouts, or capital spending. Whatever it is (if it is indeed anything at all) can it possibly make up for expected declines in housing, financials, credit card growth, consumer spending, retail, commercial loans, and capital spending?

Health care has been strong. But can it make up for declines in all the other areas? It does not take a genius to figure out the answer to that question is no. We all can't get rich off Medicaid and Medicare can we?

I agree. There is no segment of the economy that has clearly demonstrated it can be the next big wave of jobs growth. And that should concern a lot of people.

Construction Spending Decreases .4%

Link to the report from the Census Bureau.

Overall construction spending decreased (-.4%) from June 2007 and (-2%) from July 2006.

Residential spending decreased (-1.4%) from June 2007 and (-15.6%) from July 2006.

Non-residential increased .6% from June 2007 and 13.9% from July 2006.

Non-residential construction has increased from 46% of all construction spending in July 2006 to 53% in July 2007.

The bottom line is non-residential construction continues to grow at a rate to absorb residential losses. This is good news for the construction employment sector which is an area that we should be watching for signs of weakness.

Real PCEs Increase

From the BEA:

Real DPI -- DPI adjusted to remove price changes -- increased 0.5 percent in July, compared with an increase of 0.2 percent in June.

Real PCE -- PCE adjusted to remove price changes -- increased 0.3 percent in July, compared with an increase of less than 0.1 percent in June. Purchases of durable goods increased 0.5 percent, in contrast to a decrease of 1.8 percent. Purchases of nondurable goods increased 0.4 percent, compared with an increase of 0.1 percent. Purchases of services increased 0.2 percent, compared with an increase of 0.3 percent.

PCE price index -- The PCE price index increased 0.1 percent in July, compared with an increase of 0.2 percent in June. The PCE price index, excluding food and energy, increased 0.1 percent, compared with an increase of 0.2 percent.

Here's the chart that really matters -- the inflation-adjusted monthly, seasonally-adjusted annual rate of PCEs. We see an uptick in this months number which is encouraging. The last five months have been a bit stagnant. However, one month does not an increasing trend make. As I said -- this is encouraging but not definitive.

Is Construction Employment Lower?

From IBD:

"Jobless claims drifting up as they have is consistent with a slowdown" in GDP growth in the second half of the year, said John Silvia, chief economist at Wachovia.

The uptrend comes as mortgage-related firms slash tens of thousands of jobs amid a housing slump and credit crunch.

Housing starts have crashed 40% from their peak. But construction jobs have fallen just 1% from their cyclical high of 7.725 million reached last September.

Economists say the actual employment figure probably is much lower, partly because builders haven't reported layoffs of undocumented workers and other off-the-books personnel.

"There's a fair amount of labor in the construction industry that is not captured in the payroll survey," said Steve Cochrane, an economist at Moody's Economy.com.

Construction employment may be 160,000 below what current government data show, according to a study last month by Macroeconomic Advisers.

"There are less and less jobs every day," said Mario Lopez, lead organizer for the Cypress Park Community Job Center in Los Angeles. "It's a real problem for us."

If job losses are larger than official stats, consumer spending may face more pressure.

Here is a chart from the Bureau of Labor Statistics of construction employment. Economists have advanced several theories as to why this number has not dropped in conjunction with the large drop in housing starts. The most common that I have seen are:

1.) Non-residential construction has absorbed the slack (which I have advanced)
2.) The use of illegal/undocumented labor skews the numbers

In reality, I think we are seeing a combination of these two factors in the construction numbers. Non-residential construction spending has been increasing over the last year. In addition, I would assume that undocumented/illegal labor would be the first to go in a slowdown.



However, the low reported unemployment rate does not jibe with several other economic numbers one of which is consumer spending. Inflation-adjusted consumer spending has been slowing down on a month-to-month basis for the last 5 months. It was revised down to 1.4% growth in the latest GDP report. However, a loss of 160,000 construction jobs is more consistent with a slowdown of that magnitude.

GDP Increased to 4%

Here is a link to the original report from the BEA.

Here is the report from Bloomberg:

Surging exports and business spending propelled U.S. growth to the fastest pace in more than a year before turmoil in the credit markets forced the Federal Reserve to warn of a bleaker outlook.

Gross domestic product rose at a 4 percent annual rate in the second quarter, the Commerce Department said in Washington, up from an initial estimate of 3.4 percent. The median forecast of economists polled by Bloomberg News was 4.1 percent.

The figures may be the peak of the expansion for this year as the cost of borrowing increased in August and the Fed said that risks to growth ``increased appreciably.'' In a sign that the labor market is weakening, separate government numbers today showed claims for jobless benefits climbed to the highest level since April.

``The underlying economy was growing in the first half,'' said Peter Kretzmer, a senior economist at Banc of America Securities LLC in New York. ``We expect it to slow modestly, but not in such a pronounced way. It will slow enough, though, that the Fed will find an excuse'' to reduce interest rates, he said.

Kretzmer accurately predicted the pace of expansion.

The Fed's preferred inflation measure, which is tied to consumer spending and strips out food and energy costs, rose at a 1.3 percent annual rate. The pace of increase was the slowest in four years.

Personal Consumption Expenditures increase 1.4%, whith is .1% less than the previous number.

Non-residential structures investment increased 27.7%. This number was about 22% in the first GDP report. This pace is unsustainable. I have speculated this surge is the last big move in the investment field from the nonresidential sector. The turmoil in the mortgage markets adds to the credibility of that analysis.

Exports increased 7.6%. This plays into the "foreign market demand will help to prevent a recession" argument, which has also led the bulls to again recommend large US industrial and basic materials companies that have strong international exposure.

Federal spending increased 5.9%. This is also unsustainable, and I expect this rate of increase to slow down in the next few quarters.

This report gives the Fed plenty of reason to not lower interest rates at their next meeting.