An Even Stronger Second Quarter

The U.S. economic rebound in the second quarter was stronger than initially reported, the Commerce Department said Wednesday. It now says that gross domestic product rose at 3 percent rate from April through June, up from an initial 2.6 percent reading.

Consumer spending was the main engine for the strength in the second quarter, rising a revised 3.3 percent, up from the government’s original estimate of a 1.9 percent gain. Outlays of business investment rose at a revised 0.6 percent in the second quarter, up from a prior 0.4 percent estimate.

The government also reported that corporate adjusted pretax profits were up 6.7 percent over the past year, That's despite falling by 0.5 percent from the first to the second quarter.

Confident About Jobs

Consumers confidence strengthened in August to its second highest level since late 2000, a survey from the Conference Board released yesterday shows. The "present conditions" measure increased to its highest reading since July 2001.

The biggest reason for the boom in confidence is jobs. The labor differential, measuring the share of those saying jobs are plentiful minus the share saying jobs are hard to get, widened to 18.1 points, the most that figure has been since July 2001.

Those stating jobs are “plentiful” rose to 35.4 percent from 33.2 in July. Those saying that jobs are hard to get dipped to 17.3 percent, the lowest that number has been since August 2001.

Funds on the Run

It's been a rough stretch for domestic equity funds. Mutual funds and exchange-traded funds that invest in U.S. equities marked their 10th consecutive week of net outflows during the seven days that ended last Wednesday, according to Bank of America Merrill Lynch data. That's the longest such streak in 13 years.

There was $2.6 billion pulled from U.S. equity funds in that stretch, the latest recorded week. That's pushed withdrawals to $30 billion since late June, per Bank of America.

At the same time, investors put $3.1 billion into Japanese equity funds, the biggest inflow in five months, according to Bank of America. European equity funds had six straight weeks of inflows through mid-August, though they experienced $200 million in outflows in the most recent week.

Harvey's Impact

Hurricane Harvey brought unimaginable devastation to Texas this weekend, and our best wishes go out to all those affected. The economic impact promises to be immense: According to one estimate, rebuilding homes in the Houston area could end up costing as much as $40 billion.

We'll likely feel the effect here as well, since roughly a third of the nation's oil refineries are in southeast Texas. Wholesale gasoline prices are already looking at a 10 cent-a-gallon rise because of Harvey. Gasoline prices are likely to start rising in the coming weeks, say energy industry experts.

Places like New Jersey are expected to feel the biggest impact. In the Mid-Atlantic states, the price of a gallon of gas could rise 10 cents to 20 cents over the next two weeks.

Mortgage Rates Dropping Again

In a landscape where interest rates remain low, some are even dropping again. According to mortgage buyer Freddie Mac, 30-year mortgage rates have dropped to a new low for the year, reaching their lowest point since last November.

Thirty-year, fixed-rate mortgages fell to 3.86 percent, down from 3.89 percent last week. It was the fourth straight weekly decline for the key rate, bringing it to its lowest level since November 10, 2016.

But mortgage rates were even lower for most of 2016. A year ago at this time, the rate stood at 3.43 percent; it averaged 3.65 percent for all of last year.

Banks Are Lending Longer

According to a new report from the FDIC, banks are loading up on a record amount of loans that carry low rates for long periods. The percentage of bank assets that won’t mature or change rates for more than five years reached a new high in the second quarter.

Across all banks, the percentage of total assets that are at a fixed rate for more than five years was 27.5 percent in the second quarter of 2017. That's the highest that figure has been since the FDIC started tracking it in 1984. The measure reached 33.7 percent in the second quarter at larger banks, those with $1 billion to $10 billion in assets.

That means banks are allowing more borrowers to lock in low rates for long periods. That's a potential risk to the banks should rates move sharply higher, so it seems to be signaling that they expect rates to stay low for quite some time.

The Hidden Reason for Slow Wage Growth

The July jobs report from the U.S. Bureau of Labor Statistics brought welcome news on wage growth: Median weekly earnings rose 4.2 percent on an annual basis, the fastest pace seen since 2007. But the underlying story may be different from what the headline number suggests, according to a new report from the San Francisco Fed.

Wage growth for continuously full-time employed workers has been rising and is currently in line with rates seen at the previous economic peak in 2007. But aggregate wage growth continues to be held down by the entry of new and returning workers to full-time employment, who generally earn less than workers who already have full-time employment. And the turnover is in large part due to retiring baby boomers.

Sluggish wage growth, then, is less a condition of the labor market than it is due to demographics. Low wage growth is due in part to the large-scale exit of higher-paid baby boomers from the labor force. With so many of this generation still approaching retirement, the so-called Silver Tsunami will continue to be a drag on wage growth for some time.

The Crisis in Student Loans

Could the student loan debt crisis be getting even worse? Total student debt crisis has ballooned to more than $1.4 trillion, according to a new report from the Consumer Finance Protection Bureau - but that's not the end of it.

More than 40 percent of borrowers now leave school owing $20,000 or more, double the percentage from 2002. The share of borrowers owing $50,000 or more has more than tripled over the same time period, from 5 percent to 16 percent.

In addition, they're starting their repayments later. Half of student loan borrowers are over 34 when they start to repay their loans, twice the percentage since 2003. The share of borrowers who have failed to reduce loan balances after five years in repayment has also doubled, from 16 percent in 2008 to 30 percent in 2016.

The Ever-Steady Stock Market

How sleepy has the stock market been this year? For 2017 so far, the average daily trading range has been a minuscule 0.55 percent. That's the lowest percentage ever.

Here's another way to look at it: The S&P 500 through the end of last week, has not had a 5 percent decline, from peak to trough, since June 28, 2016. That sell-off, 6.1 percent over several days, occurred after Britain’s surprise vote on June 23, 2016, to leave the European Union.

So it's been nearly 14 months and counting since we had a serious sell-off. Going all the way back to 1950, the current streak is the fourth longest period without at least a 5 percent decline in the S&P.

The Dow Finally Stumbles

The Dow Jones industrial average, at long last, had a serious drop yesterday. The index fell by 1.2 percent, ending a 63-day streak of sessions without moves of 1 percent or more in either direction. That stretch was the longest since a 69-day streak in 1995.

All 30 Dow stocks also ended the day in the red. The Dow, which had just finished gaining 180 points over a four-day winning streak, had previously closed higher in 14 of the past 18 trading days.

The S&P 500 and Nasdaq both also dropped by more than 1 percent; the last time all three major benchmarks had finished down 1 percent or more was May 17. The Dow is now 1.7 percent off its closing record, with the S&P 500 and Nasdaq off 2.1 percent and 3.1 percent their respective closing highs.

The Good News in Retail

Americans have been in a spending mood. The Commerce Department reported this week that retail sales rose 0.6 percent in July from June. June's sales also were revised higher.

In July, Americans increased their spending on most goods except for clothes and gasoline. Sales also rose 1.2 percent at auto dealers, 1.2 percent at home and garden centers and even 1 percent at department stores that have been losing ground to internet rivals.

But market share losses to Amazon and similar companies remain a big problem for those department stores. Sales at nonstore retailers—a category that includes many online retailers—rose 1.3 percent last month from June. They were up 11.5 percent from a year earlier.

In Fear of Inflation

Americans rank inflation as top economic worry today, according to a new study from Allianz Life Insurance. When asked about their main economic worries today, the majority of respondents put inflation at the top of their list, with 32 percent saying they were either “panicked” or “very worried” about it.

The study found that 64 percent of respondents do not have a financial plan that addresses the rising cost of living in retirement. Of those who do, 51 percent claimed their financial “plan” to address it was to “be more frugal with money” when they retire.

On the other hand, respondents overestimated how much the cost of living will rise during retirement by predicting an average increase of 4.4 percent per year. According to the study, 31 percent of respondents thought the cost of living would go up between 5 and 10 percent per year and nearly one in 10 reported costs would increase more than 10 percent each year. The average inflation rate in the United States for the last 20 years has been only 2.15 percent.

Someone Still Loves Buybacks

One consequence of higher share prices for U.S. stocks this earnings season is that companies have pulled back considerably from buying back their own shares. New stock buybacks are at their lowest levels in five years, according to TrimTabs Investment Research. An average of just 2.8 S&P 500 companies have announced $1.4 billion in buybacks on a daily basis over the past five weeks of earnings season, the lowest such volume since May 2012.

But there's one area where there's still a lot of interest in buybacks: big banks. Bank of America, Citigroup, Goldman Sachs, J.P. Morgan Chase, Morgan Stanley, and Wells Fargo have accounted for a combined 20 percent of all stock buyback volume this year.

In addition to the 20 percent of buyback volume from banks, Apple alone accounted for 9 percent of buyback volume. Apple led buybacks with $7 billion in the second quarter, although that's off from the $10.2 billion it spent on buybacks in the second quarter of 2016.

The Dow's Losers

It's been a very strong year for the Dow Jones industrial average, which is up 14 percent so far in 2017. But not every Dow stock is a winner. Seven of the Dow's 30 stocks have lost ground on the year:

• Disney, down 3 percent
• Goldman Sachs, down 6 percent
• Chevron, down 6 percent
• Verizon, down 10 percent
• ExxonMobil, down 13 percent
• IBM, down 15 percent
• General Electric, down 20 percent

A Lost Decade for Retailers

Macy's and Kohl's both reported earnings yesterday, both disappointed, and both saw their stock drop like a rock. Macy's was off 8.8 percent on the day, while Kohl's was down 6.9 percent.

But it hasn't just been a bad quarter for retailers; it's been a bad decade. Pressed by the success of Amazon.com and lower-end retailers like Wal-Mart, many of the big retail chains have lost enormous amounts of their value in the past ten years. Some examples:

Nordstrom $12.4 billion market cap in 2006 to $8.3 billion in 2016: down 33 percent
Best Buy $28.4 billion to $13.2 billion: down 54 percent
Macy's $24.2 billion to $11.0 billion: down 55 percent
Kohl's $24.2 billion to $8.8 billion: down 64 percent
JCPenney $18.1 billion to $2.6 billion: down 86 percent
Sears $27.8 billion to $1.1 billion: down 96 percent

Gas Prices Hold Steady

Labor Day is now less than a month away and the summer driving season is starting to wind down.  According to AAA, the current national average price of a gallon of gas is $2.36 per gallon. While that is up considerably from this point last year, there have only been two years (one of them being last year) where gas prices were lower at this time of year than they are now. The only other year was 2005. 

Gasoline prices have shown a year-to-date increase of just 1.0 percent. There hasn’t been a single year since 2005 where prices saw a smaller year-to-date gain through August 8th.

Prices are typically up over 20 percent year-to-date by this point. The main reason for this year’s shortfall is that prices never saw the typical seasonal increase in the spring. We'll have to see if they also avoid the typical sharp price decline after Labor Day.

Record Job Openings

Employers across the U.S. had a record 6.2 million job openings posted at the end of June, a sign that employers are hungry for new workers, according to the Labor Department’s Job Openings and Labor Turnover Survey. After the recession, the number of job openings first set a new record in April 2015, and has continued to climb since then.

The number of job openings climbed by 417,000 in June for private employers. There were also an additional 44,000 government postings, which include state and local government.

On top of that, Americans are less likely to be laid off than at any point in at least 50 years. For every 10,000 people in the workforce, only 66 claimed new unemployment benefits in July, trending at the lowest point on record going back to 1967. The previous low point, 83 per 10,000, was touched in April 2000, at the height of the dot-com boom.

A Trillion Dollars in Debt

Americans now collectively have the most outstanding revolving debt — which is primarily credit card debt — in U.S. history. According to a report released by the Federal Reserve yesterday, Americans had $1.021 trillion in outstanding revolving credit in June 2017.

This beats the previous record set in April 2008, when consumers had a collective $1.02 trillion in outstanding credit revolving credit. Once the recession hit, banks wrote off more than $100 billion in credit-card loans over the next two years.

This year, total household debt — including housing, auto loans and student-loan debt — in the U.S. also surpassed the 2008 peak. Housing-related debt is down nearly $1 trillion since the 2008 peak, but auto loan balances are $367 billion higher, and student loans are a whopping $671 billion higher, according to the Federal Reserve.

The Dow's Slow and Steady Climb

Stocks have been rising most of the year, with the most recent visible success being the Dow Jones Industrial average climbing past 22,000 for the first time ever last week. But the market’s march higher has been slow. The Dow’s average daily move in either direction so far this year is 0.31 percent, the smallest since 1964, when it hit a record-low 0.30 percent, according to analysis by The Wall Street Journal’s Market Data Group.

The index hasn’t even had a move of more than 1 percent in either direction since mid-May. During the index’s move to 22,000 from its first close above 21,000 in March, the Dow had only four days where it moved by more than 1 percent.

And it’s not just the Dow. On Friday, the S&P 500 closed out its 12th consecutive session on Friday without a move of 0.3 percent or more in either direction. That's the longest such streak ever.

July's Jobs Report

July was another strong month for employment, with the economy adding another 209,000 jobs, according to figures released by the Labor Department this morning. The headline unemployment rate ticked down to 4.3 percent.

Employment growth has averaged 184,000 per month thus far this year, which is right in line with the average monthly gain for 2016, at 187,000. Over the past three months, job gains have averaged 195,000 per month.

The leading sector was food services and drinking places, where employment  rose by 53,000 in July. The industry has added 313,000 jobs over the course of the year. Professional and business services added 49,000 jobs in July, and health care employment increased by 39,000,

Why the Dow Is Soaring

The Dow Jones industrial average closed above 22,000 for the first time yesterday. That marks yet another record high in what has become one of its longest bull markets in history.

By far the biggest contributor to this surge has been Boeing, which has accounted for 45 percent of the Dow’s rise this year, far more than any of the other 29 companies in the index. Its shares have risen by more than 70 percent since last November.

Since the Dow hit 20,000 in January, investors have received a 57 percent return on investment from Boeing. They've also gotten a 37 percent return on Apple, and a 29 percent return on McDonald’s.

An Era of Personal Finance Pleasure

Americans are experiencing their highest levels of personal financial satisfaction in more than 10 years, according to the American Institute of CPAs. The AICPA's second quarter Personal Financial Satisfaction Index said stock market gains, more job openings and a decrease in inflation from the first quarter drove personal financial satisfaction to a high not seen since the fourth quarter of 2006.

The PFSi is calculated as the difference between the Personal Financial Pleasure Index minus the Personal Financial Pain Index. The pleasure part of the index set a record for the third consecutive quarter, clocking in at 66, up 1.4 points from the first quarter and 5.6 points from a year ago.

The pleasure index comprises four equally weighted factors that measure the growth of assets and opportunities. The Market Index has been the biggest contributor to the pleasure index for several years, setting a new record in the first quarter of this year.

Credit Card Losses on the Rise

In what could be a warning sign for markets and the broader economy, credit-card losses are mounting, a reversal of a six-year-long trend. The average net charge-off rate for large U.S. card issuers—the percentage of outstanding debt that issuers write off as a loss—increased to 3.29 percent in the second quarter, its highest level in four years, according to Fitch Ratings. The quarter was also the fifth consecutive period of year-over-year increases.

All eight large issuers, including J.P. Morgan Chase, Citigroup, Capital One and Discover Financial Services, had increases for the quarter. Card balances nationwide rose 6 percent over the last 12 months through May, a growth rate that is up from about 1 percent four years ago, according to the Federal Reserve.

While losses are rising, they remain low compared with historical levels. As the recession came to an end, the net charge-off rate reached 10 percent in early 2010.