US Economy Expanded in July but at Slower Pace, Fed Says

The U.S. Federal Reserve building in a file photo. Karen Bleier/AFP via Getty Images

The U.S. economy continued to expand in July, though at a slower pace than in June, suggesting a trend of slower but still above-average economic growth as the country continues its fitful rebound from the lows of the CCP virus fallout, data from the Federal Reserve Bank of Chicago shows.

The Chicago Fed National Activity Index (CFNAI) came in at 1.18 in July, down from 5.33 in June, according to an Aug. 24 release. Economists polled by FactSet expected the index to register a substantially higher value of 4.0, so the Fed’s figures are a surprise to the downside.

Still, since a positive index reading reflects growth above trend, while a negative reading corresponds to growth below trend, the current number of 1.18 suggests slower “but still well-above-average growth,” the Fed stated.

Positive contributions to the index were made by production-related indicators, including in manufacturing.

“It’s not surprising to see a pickup in manufacturing as the economy has started to reopen, even though pockets of the country have pulled back on their reopenings,” said Lindsey Bell, chief investment strategist at Ally Invest. “It’s an encouraging sign and it supports the upside we have seen in the markets.”

Separate IHS Markit survey reports released last week showed that in August, U.S. business activity snapped back to its highest levels since early 2019, as companies in both manufacturing and services sectors saw a resurgence in new orders.

Personal consumption and housing also made positive contributions to the Fed index, but only slightly, dropping to 0.02 in July from 0.42 in June. Personal consumption contributes around 70 percent to U.S. gross domestic product (GDP).

Last week’s home sales data for July showed deals rising at a record pace for the second straight month, providing another glimmer of growth in America’s economy.

Chart showing the Chicago Fed National Activity Index by categories. Chicago Federal Reserve

Employment-related indicators contributed 0.38 points to the Fed index in July, down from 1.94 in June. This reflects a possibly weakening trend in the labor market, in line with recent nonfarm payroll and jobless data, which shows that the economy added 1.8 million jobs in July after adding a record 4.8 million in June, while the unemployment rate fell by 0.9 percentage points in July after falling by 2.2 percentage points in June.

Last week also brought a Labor Department announcement of a rise in U.S. jobless claims, while Federal Reserve minutes released on Aug. 19 showed officials worried that the CCP (Chinese Communist Party) virus would continue to be a drag on the economy.

Fed officials said that “prospects for further substantial improvement in the labor market would depend on a broad and sustained reopening of businesses. In turn, such a reopening would depend in large part on the efficacy of health measures taken to limit the spread of the virus,” the minutes show.

Another measure of note in the Chicago Fed’s data is the so-called diffusion index, with readings above minus 0.35 historically associated with economic growth.

The diffusion index surged to 0.62 in July from 0.14 in June, suggesting economic growth continues to rise.

Chart showing the Chicago Fed's Diffusion Index from around 2007 to the present. Chicago Federal Reserve

A Reuters survey of more than 110 economists taken Aug. 14–20 found that respondents believe the U.S. economy would grow 18.8 percent on an annualized basis in the third quarter, after shrinking a record 32.9 percent in the last quarter.