The economy is heating up along with the temperatures this summer, and the pace of economic growth may be the strongest in several years. The economy in the second quarter appeared to shake off its first-quarter cold start. Personal income and consumer spending accelerated in May, increasing 4 percent and 4.4 percent year-over-year respectively. The robust expanding labor market and business conditions have paved the way for continued spending, and both consumers and businesses remain quite happy. Gains in spending reflect the benefits of the U.S. job machine kicking into gear during the last six months with job gains averaging 215,000 a month, as well as the federal tax reform plan that took effect at the beginning of the year, providing more take-home pay. Recent retail sales performance continues a steady run with a three-month moving average of 4.4 percent growth over the same period a year ago. While current readings on consumer confidence remain elevated, they have declined slightly as worries regarding tariffs have increased. The business outlook continues to be positive, with June’s Institute for Supply Management manufacturing index coming in solid at 60.2 after an index of 58.7 in May. The National Federation of Small Business’s Small Business Optimism Index, however, posted a June reading of 107.2 — near its all-time high but down 0.6 points as firms adjusted to the impact of tariffs.
The economy is barreling forward with momentum, but it cannot be expected to continue to advance at this pace. In fact, while the economy is expected to continue to grow, it could be difficult to maintain this robust economy since some of the positive forces underpinning the growth are probably temporary and there are significant speed bumps going forward. The current strong economy may be attributable to the recent surge in exports and the possible positive impact on jobs, but that surge may well be a temporary move in anticipation of coming tariffs.
All economic forecasts are sensitive to assumptions about key economic variables and to policy choices. Given the complexity of the U.S. economy, no model can accurately consider these interdependencies and account for increased uncertainties. However, there are several moving parts that have changed the underlying performance of the 2018 economy and retail sales since NRF released its 2018 retail forecast in early February — some of them positive and some negative. Those include weaker-than-expected first-quarter consumer spending, a faster-than-expected job machine in the first six months cranking out over 200,000 jobs per month, sizeable monthly revisions to retail sales by the U.S. Census in May going back several years, the passage of tax reform and the Bipartisan Budget Act of 2018, higher-than-expected inflation due in part to increased oil prices and business disruptions associated with U.S. trade policies.
Despite those mixed indicators and the threat of further trade tariffs that continue to pose uncertainty and downside risk to the U.S. economy, the economy going forward is entering the second half of 2018 with above-trend growth momentum. Inflation pressures are modest, fuel has come from the fiscal stimulus of tax reform, there are few signs of decelerating job growth, and income and wealth are increasing. Gross domestic product growth for 2018 should be ramping up toward a 3 percent range, ahead of what we expected earlier this year.
Download this month’s report, which includes the following charts and highlights:
- Consumer sentiment
- Private payroll
- Consumer credit
- Consumer inflation
- Housing starts
- Conference board leading index