The Weekly Economic & Real Estate Forecast – 10/23/17 to 10/27/17

What I Saw Last Week

The NAHB Housing Market Index for October rose from 64 to 68 – I had forecast a rise to 66.

HMI

All three HMI components posted gains this month: The component gauging current sales conditions rose five points to 75, the index charting sales expectations in the next six months was up by five points to 78, and the component measuring buyer traffic squeaked out a one-point uptick to 48. Looking at the three-month moving averages for regional HMI scores, the South rose two points to 68, the Northeast rose one point to 50, and the West and Midwest remained unchanged at 77 and 63, respectively.

This month’s report shows that home builders are rebounding from the initial shock of the hurricanes. However, builders need to be mindful of long-term repercussions from the storms, such as intensified material price increases and labor shortages.

U.S. Housing Starts declined 4.7% month-over-month to a seasonally adjusted annual rate of 1.127M units – I had forecast a drop to an annual rate of 1.160M.

Starts

The starts data was accented by a 4.6% decline in single-family starts and a 5.1% decline in multi-unit starts. Single-family starts, however, were up in all regions, with the exception of the South (-15.3%).

The number of units under construction at the end of the period increased 0.3% to 1.082 million. That brings the third quarter average to 1.076 million, which is slightly above the second quarter average of 1.070M

U.S. Building Permits which are a leading indicator, decreased 4.5% to a seasonally adjusted annual rate of 1.215M units – I had forecast a drop to 1.225M.

Permits

The month-over-month decrease in building permits was driven entirely by multi-family units. Single-family permits were flat while multi-family permits declined 16.1% after increasing 12.9% in August.

The key takeaway from the starts/permit reports was that the weakness in both starts and permits was concentrated in the South region, which suffered the biggest hit from the hurricanes, so one could reasonably assume that the October report will show better results.

U.S. Existing Home Sales increased 0.7% month-over-month in September to a seasonally adjusted annual rate of 5.39M units – I had forecast 5.29M.

Existing sales

The September sales pace is 1.5% below a year ago and the second slowest seen over the past year (behind August).

The median existing home price for all housing types increased 4.2% to $245,100, which was the 67th straight month of year-over-year gains. The median existing single-family home price was $246,800, up 4.2% from a year ago.

Existing sales $

The inventory of homes for sale at the end of September (1.90 million) is 6.4% lower than the same period a year ago and has fallen year-over-year for 28 consecutive months.

Unsold inventory is at a 4.2-month supply at the current sales pace, versus 4.5 months a year ago and the 6.0-month supply typically associated with a more balanced market.

The takeaway from the report is that notable supply constraints remain, which will continue to act as a drag on overall sales due to the limited inventory and the high prices on available inventory that is crimping affordability

What to Watch for This Week

U.S. New Home Sales were running at an annual rate of 560,000 units in August and the September number is likely to show a small pullback to 555,000.

The NAR Pending Home Sales Index for September is likely to turn around from the 2.6% decline seen the prior month. Look for it to have risen by 0.8%.

The first reading for GDP in Q-3 should show that the US grew by 2.4% – down from 3.1% in Q-2.

The final Consumer Sentiment number for October should drop from 101.1 to 101.0.

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The Weekly Economic & Real Estate Forecast – 10/16/17 to 10/20/17

What I Saw Last Week

U.S. Retail Sales rose 1.6% in September, as expected, with increases in gasoline station (+5.8%), auto (+3.6%), and building material (+2.1%) sales all getting a hurricane-related boost and leading the way.

Excluding transportation, auto sales increased 1.0% on the heels of an upwardly revised 0.5% increase (from +0.2%) in August.

Retail Sales

The takeaway from the report is that core retail sales, which exclude auto, gas, building material, and food services and drinking place sales, and which factor into GDP computations, increased a solid 0.6%.

Inflation, as measured by the Consumer Price Index featured a 0.5% increase in total CPI and a 0.1% increase in core CPI (which excludes food and energy). Of note is that the gasoline index rose 13.1% and that component accounted for about three-fourths of the increase in total CPI.

CPI

The headline numbers were a little softer than expected, which will create some chatter that they could sway the Fed into thinking that it would be prudent to hold off on a rate hike at its December meeting. That said, my money is still on rate increase in December.

The takeaway from my vantage point, though, is that the September CPI report hasn’t run afoul of the Fed’s price stability mandate. To that end, total CPI is up 2.2% year-over-year, versus 1.9% in August, and core CPI is up 1.7% for the fifth month in a row.

The preliminary University of Michigan Consumer Sentiment Index for October checked in at 101.1 which was up from 95.1 in September and the highest reading for the index since the start of 2004.

Sentiment

Consumers in general anticipate low unemployment, low inflation, small increases in interest rates, and modest income gains in the year ahead. According to the report provider, consumer attitudes reflect a sense that economic prospects are about as good as could be expected.

The takeaway from the report is that the positive sentiment occurred among all age and income groups and across all partisan viewpoints. That should presumably bode well for consumer spending, which is the most important driver of GDP growth.

What to Watch for This Week

The NAHB Housing Market Index for October should see an increase from the September number of 64 to 66.

U.S. Housing Starts were running at an annual rate of 1.3M units in August and the September figure should pull back to an annual rate of 1.160M.

U.S. Building Permits were measured at an annual rate of 1.3M in August.  I think that we will see a drop to 1.225M when the September numbers are released on Wednesday.

U.S. Existing Home Sales in August were measured at an annual rate of 5.35M.  The September figure should show a pullback to 5.29M units.

The Weekly Economic & Real Estate Forecast – 10/02/17 to 10/06/17

What I Saw Last Week

The S&P Case Shiller Index for July met my forecast for an annual increase of 5.8%. interestingly, gains in home prices have largely come from the Pacific Northwest but, seasonally adjusted, 12 of the 20 cities in the composite reported price increases in July.

CS2

Seattle, Portland, Oregon, and Las Vegas reported the highest year-over-year gains among the 20 cities.

Interestingly, if you adjust the National Index level for inflation, we are still 12.4% below the pre-bubble peak. This tells me that, although dropping, there are still a substantial number of households who are still “underwater“ and this may explain – to a degree – why listings remain below expected levels.

CS

Consumer Confidence in September dropped to 119.8 in September – I had forecast a drop to 119.4 – from a downwardly revised 120.4 (from 122.9) in August.

The Present Situation Index decreased from 148.4 to 146.1 while the Expectations Index rose from 101.7 to 102.2.

Confidence

The takeaway from the report is that the downturn was driven mostly by changing attitudes among consumers in the hurricane-ravaged states of Texas and Florida, which manifested themselves in the Present Situation Index. Overall, consumers remained relatively upbeat about the short-term outlook.

U.S. New Home Sales decreased 3.4% month-over-month in August to a seasonally adjusted annual rate of 560,000.  I had forecast an increase to 577,000.

The median sales price for a new home increased 0.4% year-over-year to $300,200.

The available inventory of new homes for sale at the end of August represented a supply of 6.1 months at the current sales rate versus 5.7 months in July, suggesting the new home market has a more balanced supply-demand situation than the existing home market where the available inventory at the end of August stood at a 4.2-months’ supply.

Sales decreased 4.7% in the South, 2.7% in the West, and 2.6% in the Northeast.  Sales were flat in the Midwest.

New sales

The takeaway from the report isn’t that sales declined 4.7% in the South, which was partly impacted by Hurricane Harvey, but that sales declined 2.7% in the West, which wasn’t impacted by Hurricane Harvey, after declining 15.3% in July. The weakness in the West could be a function of constraints related to high prices, yet it will need to be watched closely as a potential harbinger of a broader slowdown in the housing market related to affordability constraints.

The NAR Pending Home Sales Index for August fell 2.6% in August when compared to July. That is the fifth drop in the past six months and below expectations as I had forecast a drop of 0.4%. The Index is now at the same level seen in August of 2016.

Pending Index

The supply and affordability headwinds would have likely held sales growth just a tad above last year, but coupled with the temporary effects from Hurricanes Harvey and Irma, sales in 2017 now appear will fall slightly below last year. The good news is that nearly all of the missed closings for the remainder of the year will likely show up in 2018, with existing sales forecast to rise 6.9 percent.

Regionally, pending home sales in the Northeast fell 4.4% for the month and were 4.1% below a year ago. In the Midwest the index decreased 1.5% for the month and was 3.2% lower than August 2016. Pending home sales in the South fell 3.5% for the month and were 1.7% below last August. In the West sales declined 1% monthly and 2.4% annually.

Income & Spending data for August exactly matched my forecasts with incomes up by 0.2% and spending 0.1% higher.

Real disposable personal income decreased 0.1%, as did real PCE (Personal Consumption Expenditures), which will be a drag on third quarter GDP growth forecasts.  The personal savings rate was unchanged at 3.6%.

Income

The takeaway from the report is that it was more of the same: weak income growth, disappointing spending growth, and continued “lowflation”.

Consumer Sentiment at the end of September dropped to 95.1 from the early month figure of 95.3. I had forecast a rise to 95.4.

Sentiment

Consumers remain confident despite catastrophic storms, deepening political alienation, violent marches and talk of war — things that might otherwise make households cut spending and hunker down for safety — because such events are far from their day-to-day economic lives.

Consumers do have reasons to be optimistic. The economy grew by 3.1% in the second quarter, its fastest pace in nearly two years, and unemployment, estimated at 4.4% , is at historically low levels.

What to Watch for This Week

U.S. Construction Spending is likely to show an increase of 0.5% with the growth driven by residential construction.

All signs point to a disappointing jobs report for September.  My call is for Non-Farm Payrolls to have risen by just 75,000 but the Unemployment Rate should hold at 4.4%.

Consumer Credit  rose by $18.5B in July and the August number should come in at $16B.

 

 

The Weekly Economic & Real Estate Forecast – 9/25/17 to 9/29/17

What I Saw Last Week

The NAHB Housing Market Index matched my forecast for a drop to 64 as builders struggled with costs which have been intensified by the recent hurricanes and their effect on labor and materials.

HMI

All three of the index’s components reported losses in April but are maintaining healthy levels. The components gauging current sales conditions fell three points to 74, while the index charting sales expectations over the next six months dropped three points to 75. Lastly, the component measuring buyer traffic fell one point to 52.

That said, even with this month’s modest drop, builder confidence is on very firm ground, and builders are reporting strong interest among potential home buyers.

As I had anticipated, U.S. Housing Starts and Building Permits were a mixed bag with starts down but permits up – the only issue is that I had it back to front!

Building permits jumped 5.7% to a seasonally adjusted annual rate of 1.3M from an upwardly revised 1.230M for July (from 1.223M ). I had forecast a pullback to 1.223M.

Permits

The strength in permits – now at a 7-month high – was due to multi-family permits which rose by 19.6%. Single-family permits declined 1.5%. Clearly, we remain heavily influenced by apartment construction.

These mixed readings suggested housing could remain a drag on economic growth in the third quarter. Homebuilding has been treading water for much of this year amid shortages of land and skilled labor as well as rising costs of building materials.

Housing starts in August dropped 0.8% month-over-month to a seasonally adjusted annual rate of 1.18M – I had forecast a drop to 1.17M units.

Starts

Interestingly, a 1.6% increase in single-family starts helped offset a 6.5% decline in multi-unit starts.

Single-family starts declined 1.5% in the Northeast and 4.3% in the Midwest. Single-family starts were up 1.3% in the South and up 6.5% in the West.

The number of total housing units under construction at the end of August was 1.082 million. That left the second quarter average at 1.075M versus 1.07M for the first quarter.

The takeaway from the report is that the pace of single-family starts isn’t quick enough to alleviate the supply pressures in the housing market that are crimping affordability for prospective homeowners and that isn’t expected to improve next month either when the force of the impact from Hurricanes Harvey and Irma weighs on housing starts activity. I believe that construction activity could slump further in September in the aftermath of Harvey and Irma, which struck Florida. According to Census Bureau data, the areas in Texas and Florida that were devastated by the storms accounted for about 13 percent of permits issued in the nation last year.

U.S. Existing Home Sales declined 1.7% month-over-month in August to a seasonally adjusted annual rate of 5.35M units. I had forecast a smaller drop to 5.42M.

Existing sales

The August sales pace was 0.2% above a year ago, but marked the lowest pace of sales in 2017 thanks, in part, to Hurricane Harvey interrupting closings in the South.

The median existing home price for all housing types increased 5.6% to $253,500, which was the 66th straight month of year-over-year gains. The median existing single-family home price was $255,500, up 5.6% from a year ago.

Existing sales $.jpg

The inventory of homes for sale at the end of August (1.88M ) is 6.5% lower than the same period a year ago and has fallen year-over-year for 27 consecutive months. Unsold inventory is at a 4.2-month supply at the current sales pace, versus 4.5 months a year ago and the 6.0-month supply typically associated with a more balanced market.

The takeaway from the report is that notable supply constraints remain, which will continue to act as a drag on overall sales due to the limited inventory and the high prices on available inventory that is crimping affordability.

As I had anticipated, the Federal Reserve decided not to raise the key federal funds rate but did decide to start to roll off its $4.5T balance sheet starting in October.   Most of those assets consist of the Treasurys and mortgage-backed securities it acquired under a program known as quantitative easing.

In their quarterly economic projections, Federal Open Market Committee members now forecast economic growth to run a bit stronger than before. The committee’s expectations back in June were for a 2.1% GDP gain this year, but that was pushed to 2.2% in the latest projections. The long-run outlook for GDP remained at 1.8%.

What to Watch for This Week

The S&P Case Shiller Index for July is likely to show prices for the 20-city Index up at an annual rate of 5.8%.

Consumer Confidence in September should come in at 119.4 – down from a reading of 122.9 in August.

U.S. New Home Sales were running at an annual rate of 571,000 units in July and the August data will likely show marginal improvement. Look for a number of around 577,000.

The NAR Pending Home Sales Index for August should drop a little more following the 0.8% contraction seen in July. MY call is for a drop of 0.4%.

Income & Spending were both higher in July and this trend should continue. Look for incomes to be up by 0.2% and spending higher by 0.1%.

Consumer Sentiment in early September was measured at 95.3. Look for the final September figure to have risen marginally to 95.4.

The Weekly Economic & Real Estate Forecast – 9/18/17 to 9/22/17

The total Consumer Price Index rose by 0.4% in August (I had forecast 0.3%) with the core rate exactly matching my forecast for an increase of 0.2%.

CPI

On a year-over-year basis, the all items index increased 1.9%, versus 1.7% for the 12 months ending July, while core CPI remained at 1.7% for the fourth month in a row.

The key takeaway from the report is that the year-over-year bump in headline inflation toward the Fed’s 2.0% target will prompt the market to consider more carefully the prospect of another rate hike before the end of the year.

U.S. Retail Sales declined 0.2% (I had forecast +0.2%) on the heels of a downwardly revised 0.3% increase (from 0.6%) for July.  Core sales (ex-auto) rose by 0.2% (I had forecast 0.5%) following a downwardly revised 0.4% increase (from 0.5%) for July.

Retail Sales

The weakness in August was paced by a 1.6% decline in auto sales, which were impacted partly by Hurricane Harvey, as well as a 1.1% decline in non-store retailers, which was an expected letdown after Amazon’s Prime Day boosted July sales.

The takeaway from the report is that it will temper forecasts for Q3 consumer spending as core retail sales, which exclude auto, gasoline station, building equipment and materials, and food services and drinking places sales, declined 0.2%.

The preliminary University of Michigan Consumer Sentiment Index for September checked in at 95.3 (I had forecast 95.5) versus the final reading of 96.8 for August.

Sentiment

The slight dip in the sentiment reading for September was spurred by concerns related to the economic impact Hurricanes Harvey and Irma might have. Those views were reflected in the Index of Consumer Expectations, which dropped from 87.7 to 83.4.

The Index of Current Economic Conditions jumped from 110.9 to 113.9, which is the highest level since November 2000.

The takeaway from the report is that consumers’ assessment of their financial situation is the best it has been in more than a decade.

What to Watch for This Week

The NAHB Housing Market Index Was measured at 67 in August and the September number is likely to disappoint.  My call is for a drop to 64 as builders still struggle with costs.

U.S. Housing Starts and Building Permits, although generally trending higher, are still not coming in at the levels sufficient to meet demand.  Look for the August figures to be a mixed bag with starts up to an annual rate of 1.170M units (from 1.155M) and permits pulling back from an annual rate of 1.223M to 1.212M.

U.S. Existing Home Sales slipped 1.3% in July to an annual rate of 5.44M units. My call is for the August number to come in at 5.42M.

The Federal Reserve meet this week and, given the lack of wage growth and inflation, will decide not to raise the key federal funds rate.

The Weekly Economic & Real Estate Forecast – 9/11/17 to 9/15/17

What I Saw Last Week

Total Consumer Credit rose by $18.5B in July – I had forecast a more modest rise of $11.9B – after increasing a downwardly revised $11.9 billion (from $12.4B) in June.

Credit

The growth in July was driven by non-revolving credit, which was up $15.8B from June to $2.759T, and revolving credit, which increased by $2.6B to $991.9B.

Consumer credit increased at a seasonally adjusted annual rate of 6% in July with revolving credit increasing at an annual rate of 3.25% and non-revolving credit increasing at an annual rate of 7%.

Provided consumers weren’t making greater use of revolving credit lines to cover basic needs due to a shortfall in income, this report can ostensibly be looked upon as a good sign for the economy since the expansion of credit is an integral contributor to economic growth. It is hard to say, though, because there isn’t enough detail in the report and it is often subject to large revisions, which is why the market rarely shows much reaction to it.

What to Watch for This Week

Inflation – as measured by the Consumer Price Index – remains benign; however, we are likely to see a very modest increase when the August numbers are released.  Look for total inflation to have risen by 0.3% and the core rate up by 0.2%.

U.S. Retail Sales were better than expected in July with an increase of 0.6%. I expect to see a bit of a pullback in the August numbers with total sales up by 0.2% but core sales (ex-auto) should be up by 0.5%.

Consumer Sentiment in August was measured at 96.8 and I believe that the early September figure will come in at 95.5.

The Weekly Economic & Real Estate Forecast – 9/04/17 to 9/08/17

What I Saw Last Week

The Case Shiller Index for June showed annual price growth for the 20-City Index exactly meeting my forecast with an increase of 5.7%.

CS

House price appreciation reflects both recovering demand and low inventory. National payroll employment continues to grow and a healthier labor market is supportive of stronger housing demand. However; on the supply side, inventory of existing homes declined and the July unsold inventory was low, at 4.2 months and when we combine economic growth with low inventories, it is natural to see prices appreciate at above average rates.

Seasonally adjusted, 9 of the 20 cities in the composite reported price increases in the year ending June 2017, down from 14 in May. Seattle, Portland, and Dallas reported the highest year-over-year gains among the 20 cities covered.

Both the number of homes for sale and the number of days a house is on the market
have declined for four to five years and, given current economic conditions and the tight housing market, an immediate reversal in home price trends appears unlikely.

Consumer Confidence in August rose to 122.9, up from a downwardly revised 120.0 (from 121.1) in July. I had forecast a drop to 120.3.

Confidence

The bulk of the improvement in August was tied to the Present Situation Index, which rose from 145.4 to 151.2. The Expectations Index rose from 103.0 to 104.0.

Of note is that the percentage of respondents stating jobs are plentiful rose from 33.2% to 35.4%, while those claiming jobs are hard to get dropped from 18.7% to 17.3%.

The takeaway from the report is that consumer confidence remained high as the current labor market assessment overshadowed a lot of the political drama that has called into question the ability to implement a tax reform plan this year.

The second estimate for US GDP in the second quarter showed the economy expanding at 3.0% from the initial estimate of 2.6% – I had forecast a more modest increase to 2.7%.

GDP

The upward revision stemmed from upward revisions to personal consumption expenditures (from 2.8% to 3.3%) and gross private domestic investment (from 2.0% to 3.6%), which was led by non-residential fixed investment (from 5.2% to 6.9%). Government spending was revised down (from 0.7% to -0.3%).

Of note is that the overall GDP growth rate was the first with a 3-handle on it since the first quarter of 2015!

The second estimate for second quarter GDP will feed a good economic narrative and the takeaway from the report is that it was driven by a pickup in both consumer and business spending, which is typically a good mix for accelerating economic growth.

Income & Spending both rose in July with incomes up by 0.4% (I had forecast 0.3%) and spending up by 0.3% (I had forecast 0.4%).  The personal savings rate dipped from 3.6% to 3.5%.

Income

PCE (Personal Consumption Expenditures) price inflation remains well below the Fed’s longer run target of 2.0%, yet it is the dip in the core inflation rate that stands out today because that can’t be blamed on volatile energy prices.

Real personal consumption expenditures increased 0.2%, which will be a positive input for Q-3 GDP forecasts, and rose 2.7% year-over-year versus 2.6% in June. Real disposable personal income increased 0.2% and is up 1.3% year-over-year versus 1.2% in June.

The takeaway from the report was that inflation pressures remained subdued, which suggests to me that expectations for another rate hike this year will also remain subdued.

The NAR Pending Home Sales Index decreased in July for the fourth time in five months, and now has decreased year-over-year in three of the past four months.

The Pending Home Sales Index, a forward-looking indicator based on signed contracts decreased 0.8% to 109.1 in July from a downwardly revised 110.0 in June, and fell 1.3% below a year ago. I had forecast a less substantial 0.5% drop.

Pending Index

The PHSI increased 0.6% in the West in July, but fell 0.3% in the Northeast, 0.7% in the Midwest and 1.7% in the South. Year-over-year, the PHSI increased 2.4% in the Northeast, but fell 0.2% in the South, 2.8% in the Midwest and 4.0% in the West.

The NAR reported that although buyer traffic remains higher than a year ago, house hunters face limited options. While the median sales price increased 38% over the past five years, incomes have increased only 12%, putting pressure on affordability, especially for prospective first-time buyers. Existing sales declined in July, and new home sales also faltered, although they remain up 9.2% for the year. However builder confidence jumped up in August, suggesting that new residential construction will continue its upward trend and address the tight inventory of homes for sale.

US Non-Farm Payrolls grew by a somewhat disappointing 156,000 in August (I had forecast a more robust 183,000).

Payrolls

Over the past three months, job gains have averaged 185,000 per month. July non-farm payrolls were revised down to 189,000 from 209,000 and the June number was also revised down to 210,000 from 231,000.

August private sector payrolls increased by 165,000 with July private sector payrolls revised down to 202,000 from 205,000 and June private sector payrolls revised up to 207,000 from 194,000.

The takeaway here is that, historically, August payroll numbers have been the most volatile due to seasonal distortions, often coming in weak at first reading only to be revised higher. For example, in 2011, the initial reading came in at zero, but later was revised up to 104,000. In 2016, the first report showed 151,000, while the final number moved up to 176,000.

The number, therefore, should not be taken as a sign of slowing growth.  At least not yet!

The Unemployment Rate in August rose to 4.4% (I had forecast it to have remained at 4.3%).

U RAte

Persons unemployed for 27 weeks or more accounted for 24.7% of the unemployed versus 25.9% in July. The U-6 unemployment rate, which accounts for both unemployed and underemployed workers, held steady at 8.6%.

The takeaway from the report is that wage inflation is still not picking up despite the low unemployment rate. That will keep the “Goldilocks” narrative in place, which has served as a perfectly-cooked bowl of porridge for a stock market that has feasted on a backdrop of modest growth and low inflation.

US. Construction Spending dropped by 0.6% in July (I had forecast a 0.5% increase).

Con Spend

The July decline was driven by a 1.4% decrease in total public construction spending and a 0.4% decrease in total private construction spending.

On the public side, non-residential spending dropped 1.4%, with almost every component category seeing a decline in spending. The lone exceptions were Power (+11.6%), Public Safety (+5.8%), and Highway and Street spending (+0.1%).

On the private side, residential spending increased 0.8% with new single-family spending increasing by a like amount to offset a 0.8% decline in non-residential spending, which was fueled by declines in all component categories.

Total residential construction spending increased 0.8% in July while total nonresidential spending fell 1.7%.

On a year-over-year basis, total construction spending is up just 1.8%, with public construction spending down 5.6% and private construction spending up 4.1%.

The takeaway from the report is that the decline in construction spending will act as a drag on Q-3 GDP forecasts.

The final August estimate for Consumer Sentiment came in at 96.8 (I had forecast a drop to 97.1) from an originally reported 97.6.

Sentiment

The Current Economic Conditions Index dipped to 110.9 from the preliminary reading of 111.0. The final reading for July was 113.4.  The Index of Consumer Expectations fell to 87.7 from the preliminary reading of 89.0. The final reading for July was 80.5.

The takeaway from the report is that consumer sentiment remains at high levels despite the (geo)political drama as consumers reportedly have maintained a favorable assessment of their own financial situations.

What to Watch for This Week

Total Consumer Credit rose by $12.4B in June and I expect to see the July number come in at around $11.9B.

 

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