2nd Quarter Economic Update | August 2018

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2nd Quarter Economic Update | August 2018

Real gross domestic product (GDP) increased 4.1% in the second quarter of 2018, according to the “advance” estimate released by the Bureau of Economic Analysis.  This is up from 2.2% in the first quarter.  The 2nd quarter increase in real GDP reflected increases in consumer spending, exports, business investment, and government spending.  The only decreases were in business inventory investment and housing investment.  The increase in consumer spending reflected increases in services and both durable and nondurable goods.  The unemployment rate is low, wages are increasing and people, in general, feel good about their financial situation.  The increase in exports reflected increases in exports of goods.  Clearly a result of foreign companies purchasing supplies prior to tariff rate increases going into effect.

Concerns, however remain.  Last quarter we noted the possibility of the economy overheating.  We now believe this is less likely because of the potential impact of a global trade war.  Business activity appears to be slowing as companies weigh the odds of there being a trade war or not.  As is, the tariff increases that have been implemented are small relative to global trade.  The real danger continues to be the uncertainty about what happens next.  If trade tensions sap business confidence, causing executives to put off capital spending and other investment decisions, then the damage could get serious.  Time will tell.

Global economic growth continues at a steady rate despite lingering trade policy uncertainties, pockets of political instability and tighter financial conditions.  Early GDP growth estimates for the global economy put year-over-year growth at 3.5% in Q2.  While overall figures continue to show growth momentum globally, country data reveals that the expansion is becoming less even, and that there is growing divergence between developed and developing economies.  The Eurozone appears to be peaking while developing countries whose economies are commodity based are seeing accelerating growth.

Here is a summary of some important economic indicators, showing historical information and areas of potential risk that could threaten the economic recovery in the U.S.A.

Retail Sales – Sunny.  The good news continues, quarter over quarter.  Retail Sales are up a whopping 6.6% year-over-year.  Since March, sales of all kinds have surged, a possible result of rising wages and tax cuts.  Restaurant sales and the sales of building materials were strong.

All-in-all, with the consumer representing 75% of GDP, we believe they will steadily propel economic growth through 2018 and into 2019.

Wholesale TradeSunny.  US Wholesale Trade is growing at an accelerating rate for both Durable and Nondurable Goods.  Growth in the durable goods segment is up 8.8% year-over-year while growth in non-durable goods is up 6.5% year-over-year.

We continue to expect accelerating growth in both durable and nondurable segments through the end of 2018 only to slow in early 2019.

Manufacturing Sunny.  Total manufacturing production during the 12 months through June is up 1.9%.  Foreign demand is supporting domestic production and we are seeing stronger growth in new orders.  This is driving a solid increase in outstanding business.  Of 18 industries, 17 reported growth in June.

Price pressures within the factory sector intensified, partial acerbated by the introduction of tariffs.  We expect continued growth through 2018 assuming the trade war does not escalate.

Interest RatesPartly Sunny.   Short-term interest rates are rising faster than long-term rates, flattening the yield curve.  Some fear that an inversion of the yield curve is imminent, signaling a recession.  While the possibility of a trade war is a factor, we believe today’s flattening is more technical in nature.  The Fed’s normalization program requires lifting the short end first.  Long-term rates will rise more slowly.

The Fed will continue to raise short term rates.  The labor market is tight, wages are rising and inflation is beginning to accelerate.  We think rates will rise at least twice before the end of the year.

Capital Goods New Orders Partly Sunny.  New orders were up 7.7% year-over-year.  New orders for key U.S.-made capital goods increased more than expected in the quarter and shipments surged pointing to solid growth in business spending.

However, leading indicators are signaling a potential slow down later in the year, possibly a result a potential full-scale trade war.  Assuming the tariff tiff abates, we anticipate this metric will continue to improve through the end of 2018 and 2019.

ConstructionPartly Sunny.  The housing market is slowing down.  Total housing starts slumped in the quarter because of lower building activity across the nation.  Both single and multi-family starts fell.  Existing home sales are down 2.2% year-over-year.

The headwinds mentioned in prior quarter economic updates are finally beginning to directly impact home buyers.  Tight inventories of homes are leading to higher housing prices.  There are also critical shortages; ready-to-build lots are in short supply, skilled labor is hard to find, and rising mortgage rates could negatively impact this metric.

Even with these headwinds, we anticipate construction will recover into 2019.

 International – Partly Sunny.  The world economy, while strong, is showing signs it may have peaked.  The World Economic Outlook (WEO) maintained its’ 2018 global growth projection at 3.9%.

In the Eurozone, growth projections have been revised downward due to negative surprises to economic activity.  Employment growth, however, has been running at the highest rates seen in the last 20 years, a positive indicator for potential 2019 economic growth.

In the Asia/Pacific region, China reported 6.8% growth showing remarkable stability.  However, any escalation in the trade war may reverse this very quickly.

Emerging Markets continued to see better than expected growth mainly due to the recovery and stabilization of commodity prices.

Global economic growth continues at a steady rate despite lingering trade policy uncertainties, pockets of political instability and tighter financial conditions.

 

By | 2018-08-14T13:28:07+00:00 August 14th, 2018|Categories: On Our Minds|Tags: , , , , |0 Comments

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