The Labor Department announced that productivity rose 1.4% in the second quarter, up from a revised 0.8% in the first quarter. As productivity accelerates, it is good for growth and is suppressing inflationary pressure. Fed Chairman Kevin Warsh at his Senate confirmation hearing said, “Do I believe that the productivity improvements over time will be structurally disinflationary? I do. I believe everything technology touches ultimately gets cheaper.”
The Institute of Supply Management () announced that its non-manufacturing, service index rose slightly to 54.1 in July, up from 54 in June. This was the 25th straight month that the ISM service index has been expanding (over 50), but July’s reading was below economists’ consensus expectation of 54.5. The details were positive, since the business activity component surged to 59.1 in July (up from 55.4 in June) and the new orders component rose to 57.2 in July (up from 55.1 in June). Fully 13 of the 17 service industries that ISM surveyed reported an expansion in July.
Meanwhile in the eurozone, in June declined 0.3%, which means that many countries in the European Union are faltering. A heat wave has not helped the EU, since obviously many citizens are miserable due to a lack of air conditioning. Also, many key rivers are low, which means the nuclear plants in France, Hungary, and Romania may have to shut down. The retail sales drop was the most dramatic in Germany (1.1% decline) and France (0.5% decline), which are the two largest economies in the EU. Until the heatwave breaks in September, it may not be evident just how hard retail sales have been curtailed in the EU.
Back in the U.S., 71% of the have announced their second quarter results, and revenues are running 3.8% higher than analyst consensus estimates, while earnings are coming in at 7.3% higher than analyst consensus estimates. Fully 77% of the S&P 500 have posted a revenue surprise, while 83% of stocks have posted an earnings surprise. Interestingly, this is also the twelfth quarter in a row where earnings are exceeding sales growth, which is indicative of profit margin expansion.