On June 26, the personal income and spending report for May revealed that personal income met expectations, but consumption fell below forecasts. According to analysts, the unexpectedly weak spending growth of just +0.2%, compared to the anticipated +0.4%, raises concerns about a potential rebound in second-quarter GDP. However, it is important to note that evaluating data solely on a monthly basis can be misleading. Year-over-year changes give a clearer picture of trends, and recent figures continue to indicate modest economic improvement.
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Yale Professor Robert Shiller warns that the US stock market may be facing a peak. “It looks to me like a peak,” he told Yahoo Finance. Utilizing his cyclically adjusted price-to-earnings ratio (CAPE), he observed that the current level of approximately 26 has only exceeded this three times since the late 18th century: in 1929, 2000, and 2007.
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Tomorrow, the update on US personal consumption spending for May is anticipated to show an increase of 0.5% compared to the previous month, according to The Capital Spectator’s median econometric forecast. This projection is significantly better than the 0.1% decline reported for April.
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The recent sales data for new and existing homes has delivered more positive news this week, leading some analysts to predict a robust revival in the residential real estate market as summer approaches. However, a deeper analysis of the data indicates that the housing recovery remains sluggish overall. While one promising month of sales is heartening, it does not significantly alter the ongoing slow recovery trend in this sector of the economy.
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Existing-Home Sales Heat Up in May, Inventory Levels Continue to Improve
National Assoc. of Realtors | June 23
The latest report indicates a strong rise in existing-home sales in May, along with continued increases in inventory which have helped to stabilize price growth, as reported by the National Association of Realtors. All four regions of the country experienced sales increases compared to the previous month. “Home buyers are benefiting from slower price growth due to the much-needed rising inventory levels seen since the beginning of the year,” noted Lawrence Yun, NAR’s chief economist. He also mentioned that improving job market conditions and a temporary decrease in mortgage rates have contributed to these sales.
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According to this morning’s update of the Chicago Fed National Activity Index, US economic growth remained “above trend” in May, with the three-month average of the index (CFNAI-MA3) registering above zero for the third consecutive month. Although it declined slightly to +0.18 from a revised +0.31 for April, this reading indicates that the CFNAI-MA3 is still well above the neutral mark, thus keeping recession risks low as of May.
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Expectations for US economic growth in the second quarter of this year are optimistic after a 1.0% decline in Q1. Projections for this quarter include the Capital Spectator’s median econometric nowcast, which anticipates a GDP increase of 3.3% from April to June (at a real seasonally adjusted annual rate). This is an improvement from the previous nowcast of 2.8% for Q2. The final estimate for this quarter will be published soon, ahead of the US Bureau of Economic Analysis (BEA)’s initial Q2 GDP report, set for release on July 30.
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The three-month average of the Chicago Fed National Activity Index (CFNAI) is expected to incrementally rise to +0.20 in tomorrow’s update for May, based on The Capital Spectator’s median econometric forecast. This is nearly identical to the +0.19 reading for April, which also indicated above-average economic growth. Values below -0.70 suggest an “increasing likelihood” of a recession according to guidelines from the Chicago Fed. With the projected average for May, the CFNAI is anticipated to remain at a level associated with growth and moderately above-trend pace.
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● The Consolations of Economics: How We Will All Benefit from the New World Order
By Gerard Lyons
Review via The Telegraph
This book examines why the world has become increasingly interconnected over the past 40 years, addressing pivotal moments such as President Nixon’s decision to abandon the gold standard in 1971, the Big Bang of the London markets in 1986, and China’s emergence as an economic superpower. Lyons also discusses potential future crises, including market instability and growing inequality. Nevertheless, he assures readers that as long as we adhere to the fundamental principle of allowing the market to function, these crises are manageable. He raises the question of how to cultivate a market free from bias.
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This month, I discussed an econometric tool—the Hidden Markov model (HMM)—designed for early identification of bear markets with a high degree of reliability. The results for the last 50 years, specifically concerning the US stock market (S&P 500), appear promising. However, some readers expressed concerns about whether this positive performance in historical analysis would translate to future outcomes. This question is always pertinent when it comes to forecasting. Many models perform exceptionally well with historical data yet falter when faced with future scenarios. Does the HMM model face this risk? Early testing suggests it does not.
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