FOMC Minutes Aug 22

The information reviewed at the July 31-August 1 meeting indicated that economic activity increased at a slower pace in the second quarter than earlier in the year and that labor market conditions had improved little in recent months. In addition, revised data for 2009 through 2011 from the Bureau of Economic Analysis indicated that the recession had been slightly less deep and the early part of the subsequent recovery had been a bit more gradual than previously thought, leaving the level of real gross domestic product (GDP) at the end of last year essentially the same as estimated earlier. In the second quarter, consumer price inflation was markedly lower than in the first quarter, mostly reflecting substantial declines in consumer energy prices, while measures of longer-run inflation expectations remained stable.

Private nonfarm employment expanded in June at about the same modest pace as in the second quarter as a whole, and government employment decreased slightly. The unemployment rate was 8.2 percent in June, the same as its average during the first half of the year. The rate of long-duration unemployment stayed elevated, and the share of workers employed part time for economic reasons was still high. Indicators of job openings and firms’ hiring plans were generally subdued. While initial claims for unemployment insurance trended down a bit over the intermeeting period, they remained at a level consistent with continued modest increases in employment in the coming months.

Manufacturing production decelerated significantly in the second quarter following a large gain in the first quarter, while the rate of manufacturing capacity utilization was unchanged on balance. The production of motor vehicles and parts increased considerably last quarter, but factory output outside of the motor vehicle sector was essentially flat. Automakers’ schedules indicated that the pace of motor vehicle assemblies in the third quarter would be about the same as in the second quarter. Broader indicators of manufacturing output, such as the diffusion indexes of new orders from the national and regional manufacturing surveys, declined in recent months and were at levels consistent with only muted increases in production in the near term.

Real personal consumption expenditures increased at a slower rate in the second quarter than in the first quarter, primarily reflecting a decrease in spending for motor vehicles. Meanwhile, real disposable personal income rose at a faster pace than consumer spending in both the first and second quarters, boosted in part in recent months by lower energy prices. Consumer sentiment as measured by the Thomson Reuters/University of Michigan Surveys of Consumers (Michigan Survey) was more downbeat in June and July than earlier in the year.

Conditions in the housing market generally improved further in recent months, but activity remained at a low level against the backdrop of the large inventory of foreclosed and distressed properties and tight underwriting standards for mortgage loans. Both starts and permits of new single-family homes increased in the second quarter. Starts of new multifamily units were about the same last quarter as in the previous quarter, but permits rose, which pointed to higher multifamily construction in the coming months. Home prices increased in May for the fifth consecutive month. Sales of new homes in the second quarter were moderately higher than in the first quarter, but existing home sales decreased slightly.

Real business expenditures on equipment and software rose in the second quarter at a faster pace than in the first quarter. However, new orders for nondefense capital goods excluding aircraft decreased last quarter, and the backlog of unfilled orders decelerated sharply. Other recent forward-looking indicators, such as surveys of business conditions and capital spending plans, also suggested that increases in outlays for business equipment would slow in coming months. Real business spending for nonresidential construction increased somewhat in the second quarter but remained at a relatively low level. Meanwhile, business inventories generally appeared to be relatively well aligned with sales.

Real federal government purchases decreased a little in the second quarter, following a much sharper decline in the previous three quarters, as the continued contraction in defense spending eased. Real state and local government purchases continued to contract at a moderate rate last quarter.

The U.S. international trade deficit narrowed in May, as exports edged up and imports declined. The increase in exports primarily reflected higher exports of services and agricultural products. The decrease in imports was the result of a decline in oil imports, as both the price and the quantity of oil imports fell. Imports of consumer goods and industrial supplies also moved down, but imports of capital goods and automotive products increased. Based on an estimate of the trade data for June, the advance release of the national income and product accounts showed that real net exports of goods and services made a small negative arithmetic contribution to the increase in U.S. real GDP in the second quarter.

Overall U.S. consumer prices increased at a slower pace in the second quarter than in the first. Consumer energy prices declined significantly last quarter, and survey data indicated that gasoline prices fell somewhat further in the first few weeks of July. Meanwhile, consumer food prices posted only a small increase last quarter, but the recent sizable run-up in spot and futures prices of farm commodities, reflecting the effects of the drought and hot weather in the midwestern part of the United States, pointed to some temporary upward pressures on retail food prices later this year. Consumer prices excluding food and energy increased more moderately in the second quarter than in the first. Near-term inflation expectations from the Michigan Survey rose a little in June and July, while longer-term inflation expectations in the survey continued to be stable.

Available measures of labor compensation indicated that nominal wage gains remained restrained. The employment cost index rose at a modest pace again in the second quarter. Average hourly earnings for all employees also increased at a relatively slow rate last quarter.

Foreign economic growth continued to be subdued, as fiscal retrenchment and financial stresses in the euro area continued to weigh on economic activity in Europe and elsewhere. Recent indicators of production and confidence in the euro area remained weak, and the preliminary second-quarter estimate of real GDP in the United Kingdom showed a contraction. Real GDP in China accelerated somewhat in the second quarter following a relatively weak expansion in the first quarter, and recent monthly data suggested some further improvement. However, data for other emerging market economies generally pointed to a deceleration in economic activity last quarter. Foreign inflation eased in the second quarter and remains well contained, as earlier declines in the prices of energy and other commodities passed through to the retail level.

Federal Reserve

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Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell