Monthly Economic Review: July-August 2016

Perhaps the economy is stronger than the data indicate?
MER July-Aug 2016

Second-quarter U.S. economic growth was well below expectations, increasing at an annualized rate of 1.2 percent, nearly half the gain anticipated by consensus forecasts. Consumer spending was the main driver of growth while investments continued to slouch and inventories fell for the first time since 2011. A lot of noise remained in the gross domestic product numbers related to the flagging energy sector and the global slowdown, but this could be clarified when numbers for the quarter are updated in August and September. The weak headline figure was somewhat discordant with a number of other indicators, and the underlying fundamentals of the economy are not as negative. 


Final real domestic sales across all sectors of the economy adjusted for inflation, a key measure of the domestic economy that takes out inventories and exports from GDP totals, were up solidly 2 percent on a year-over-year basis.  


A strong 255,000 net new jobs were added to the economy in July, which followed the blowout of 292,000 in June. Along with pulling more workers into the workforce, both average hourly earnings and average weekly hours increased in July. Consequently, there are more people employed, more working longer hours and more earning larger pay. Taken together, that increases the propensity for retail spending.    


Consumers have the ability to spend and are in a good place due to rising or steady wage growth, increasing prices of homes and investments, an elevated confidence about the economy and not being overleveraged in their borrowing.


Looking ahead, the economy appears to be on much more sturdy footing than some of the data indicates. While there are several blemishes, the probability of a recession remains relatively low. 

July’s retail sales numbers were flat compared with June and may have dampened expectations about the economy.  However, coming off two months of strong payroll gains, there is reason to be skeptical of the reported numbers. Seasonal factors used to adjust the raw data are often at play, especially in the summer months — July had five full shopping weekends this year compared with four in 2015, the Fourth of July was on a weekday rather than a weekend and Amazon held its second annual Prime Day. In addition, most of the nation has seen extremely warm temperatures this summer, and higher air conditioning costs may have diverted discretionary income from consumer spending. Given those considerations, it is important to wait for updates to be released to fully assess July’s retail spending numbers.   

Download the latest report, which includes the following charts and highlights:

  • Retail sales
  • E-commerce
  • Employment
  • Payroll
  • GDP growth
  • Housing Market Index
  • Conference Board Index