Morning Report: GDP disappoints 7/29/16

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US dollar index 86.8 -0.9
10 Year Govt Bond Yield 1.49%
Current Coupon Fannie Mae TBA 103.3
Current Coupon Ginnie Mae TBA 104.2
30 Year Fixed Rate Mortgage 3.51

Stocks are lower this morning after the advance estimate for 2Q GDP came in well below expectations. Bonds and MBS are up.

The advance estimate for second quarter GDP came in at +1.2%, which was well below the 2.5% survey estimate. The first quarter number was revised downward to 0.8%. Stronger consumer spending offset weak business investment. Consumer spending rose 4.2% while business investment fell 2.2%. The core personal consumption expenditures index rose at 1.7% ex food and energy, which is still below the Fed’s target rate. The economy has definitely taken a turn slower over the past 3 quarters.

GDP bar chart

The employment cost index rose 0.6% in the second quarter, according to the BLS. Compensation costs were up 2.3% YOY as salaries rose 2.4% and benefit costs rose 2%. Comp costs had been running at a 2% clip for the past year, so this number is actually a pretty big jump.

The homeownership rate fell to a 50 year low last quarter, hitting 62.9% which was last seen in the mid 60s. We don’t have data before that. Some of the increase in the homeownership rate was due to social engineering that began with the Clinton Administration, so maybe the heights were somewhat artificial, however it probably does have room to rebound, and that represents pent-up demand. I keep harping on this, but the big reason why GDP is so weak is because housing construction is still well below normalcy. Increasing housing construction would help with the affordability issue, which has been a driver of the decline as well as putting people to work. Unfortunately builders don’t have the confidence to break out of their 1.1 million – 1.2 million start range we have been stuck in for the last year.

homeownership rate NAD

Consumer sentiment slipped in June, according to the University of Michigan.

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