Week of August 31, 2015
Despite the rocky start, markets finished the week higher. The concerns about slowing global growth, led by China, spilled over from the previous week and pressured stocks lower on Monday and Tuesday. At one point during the trading session on Tuesday, the S&P 500 fell to 12% below its recent peak. By mid-week the Federal Reserve came to the rescue when New York Federal Reserve President William Dudley hinted that the central bank may not raise rates in September given the market volatility. This buoyed markets higher throughout the remainder of the week, erasing the damage caused during the first two days. The Dow Jones Industrial Average and S&P 500 rose around 1% for the week, while the Nasdaq Composite jumped 2.6%.
Broad Based GDP Growth Reported
Last Thursday the Commerce Department revised its second quarter GDP growth figure to 3.7%, much faster than the initial reading of 2.3%. Importantly, the data points to broad based expansion that supports the view that the U.S. economy is on solid footing. Corporate profits grew better than 5% in one of the strongest quarterly displays in nearly a year. Consumer spending, which accounts for two-thirds of economic output, jumped 3.1%. This is higher than the initial estimate of 2.9%, and starkly better than the sub-2% rate posted in 1Q15. Businesses loosened the purse strings too. Non-residential fixed investment rose 3.2%, well ahead of the initial estimate of 0.6%. Another significant improvement was spending by state and local governments. This grew 4.1%, the strongest level since 2001. Government spending has been a drag throughout much of the recovery.
Source: Wall Street Journal, August 2015 (subscription required), http://www.wsj.com/articles/u-s-gdp-expands-at-3-7-pace-in-second-quarter-1440678866
Durable Goods Orders Impress
In another positive note for the U.S. economy, orders for durable goods rose in July for the second consecutive month. Durable goods are products designed to last at least three years. The July increase was well above expectations of most economists. The increase stems from business investment in new machinery. The core figure, which eliminates defense and transportation spending, rose 2.2%. This is the biggest increase in nearly a year. This suggests that manufacturing activity could be accelerating after slowing in the early part of 2015. Additionally, the June figure was revised higher to 4.1%.
Dueling Fed Governors
The market turmoil coinciding with improving domestic economic data has created a difficult decision for the Federal Reserve, since prior to last week many market participants expected a September rate hike. Last Wednesday, New York Federal Reserve Bank President William Dudley proclaimed the prospects for a rate hike in September have dimmed given the market turmoil and international economic developments. However, two other Fed members James Bullard and Loretta Mester declared the economy is strong enough to sustain a rate increase. Vice Chairman Stanley Fisher is straddling the fence. He described the data on the U.S. economy as “impressive”, but said the jury is still out on whether or not liftoff will occur in September.
Fun Story of the Week
Have you ever wondered why a baby’s scream is so hard to ignore? Neuroscientists now think they know why. A recent study in Cell Biology found that certain loud sounds, like a baby’s scream or car alarm, always catch our attention because they trigger specific fear sensors in our brain. The project, which began because several post doc students in the Max Planck Institute lab were having kids, tried to figure out how and why. What they discovered was a distinct difference in what is called the amplitude modulation rate. The modulation rate is how often the loudness of a sound changes. During the course of a normal conversation people exhibit a modulation rate of four or five changes per second. When a baby screams this jumps to 100 changes per second, giving it an acoustic quality known as roughness. Screams are the only human sound with this degree of roughness, which is why they are so noticeable.
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Wall Street Journal, August 2015, https://blogs.wsj.com/economics/2015/08/27/economists-react-to-u-s-gdp-growth-recovery-shifted-up-a-few-gears/
Wall Street Journal, August 2015 (subscription required), http://www.wsj.com/articles/u-s-gdp-expands-at-3-7-pace-in-second-quarter-1440678866
Wall Street Journal, August 2015 (subscription required), http://www.wsj.com/articles/yuan-may-fall-on-chinas-rate-cut-and-stimulus-measures-1440548879
Wall Street Journal, August 2015 (subscription required), http://www.wsj.com/articles/u-s-durable-orders-rose-2-in-july-1440592453
Wall Street Journal, August 2015 (subscription required), http://www.wsj.com/articles/feds-dudley-says-new-york-economy-is-a-bright-spot-1440597601
Bloomberg, August 2015, http://www.bloomberg.com/news/articles/2015-08-28/fischer-says-sept-liftoff-undecided-as-markets-cloud-outlook
NPR, July 2015, http://www.npr.org/sections/health-shots/2015/07/16/423493616/screaming-for-science-the-secrets-of-crying-babies-and-car-alarms?utm_source=facebook.com&utm_medium=social&utm_campaign=npr&utm_term=nprnews&utm_content=20150716
Wall Street Journal, August 2015, http://blogs.wsj.com/briefly/2015/08/27/u-s-gdp-growth-at-a-glance/