Economic Update for 7-31

This morning we saw a rebound in Personal Income for the month of June. Income for the month of June was up 0.3%, compared to a decline of 0.4% during May. Given this rebound, Personal Spending increased by 0.3% during June compared to a flat reading the prior month. The positive spending trends were mostly in nondurable goods and services. The Fed’s preferred measure of inflation, PCE, was also released earlier today. On a year-over-year basis, the PCE Index (personal consumption expenditures) rose by 2.6% as of June. This represented the most in four months and continues to exceed the Fed’s inflation goal of 2.0%. The higher inflation reading does provide some additional support to the Fed’s decision yesterday to keep rates unchanged.

Yesterday, we had the second quarter GDP growth number released and it showed annualized growth of 3.0%. This was a favorable contrast to the 0.5% decline during the first quarter. This number was also well above the forecasted level of growth of 2.4% for the quarter. However, one of the primary causes for the stronger growth number was a decline of over 30% in imports. Remember, growth in GDP was negatively impacted during the first quarter by a surge of almost 38% in imports. The anticipated higher tariff rates during Trump’s second term resulted in consumers and businesses rushing to buy foreign goods before these new rates were enacted. The fear was that higher tariff rates would result in higher prices for most foreign goods. In actuality, as we have commented on previously, the tariff levels announced by Trump have primarily been a bargaining ploy by this administration and favorable trading relationships between the U.S. and most of our trading partners have been the result. We anticipate more of these positive trading dynamics to be announced within the next few weeks. As this trend continues, most forecasts show economic growth for the year around 2%.

Our view regarding the Fed is that they probably missed an opportunity to begin to lower interest rates by not cutting the Fed Funds Rate by at least a ¼ point yesterday. The economy is showing signs of growth but some specific areas, such as housing, would benefit greatly if mortgage rates were to fall. Inflation, even though somewhat above the targeted level, is showing signs of moderation. The favorable trading announcements should certainly allow inflation to trend lower. I believe it is almost a certainty the Fed will begin to cut rates at their next meeting in September. Chairman Powell’s remarks following their two-day meeting yesterday gives support to this view. Our outlook for both equity and fixed-income investing remains mostly positive. In terms of our bond investments, we continue to believe it is advantageous to be in higher-quality issues and the relatively flat “yield-curve” allows our maturity levels to be somewhat shorter than normal. We will continue to add gradually to our equity holdings as opportunities allow. We are in a time period where earnings for the June quarter are being released. We are analyzing these results for our existing names and looking for new companies that look attractive now and into the future.

Given the recent high-heat warnings for many parts of the country, I hope each of you are being responsible for your own safety. Take care and you should hear from us again next week.

Rudy Thomas, President

Fairway Asset Management