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.