Monthly Economic Review: June 2018

Economic measures point to stronger near-term growth
Monthly Economic Review June 2018

The current economic expansion has now lasted 108 months — a full nine years — and is the second-longest on record. Since the evidence shows the U.S. economy is in a period of sustained growth, it is likely to surpass the all-time record of an even 10 years that ran from March 1991 to March 2001.

Going forward, economic fundamentals for the U.S. economy and the consumer are in place and consistent with NRF’s outlook for economic performance for the rest of 2018. NRF expects retail sales to grow between 3.8 percent and 4.4 percent over 2017, and gross domestic product growth should be ramping up toward the 3 percent range. A tailwind from the tax legislation passed last year has added strength and momentum, although tariffs threaten to offset some of those gains.

Soon-to-be-released second-quarter numbers are expected to show a rebound from the weak first quarter driven solidly by consumer spending. There have been sizeable job gains, very low unemployment, a pickup in wages, relatively low interest rates and gains in home prices. In addition, the stock market is underpinning very confident consumers who appear to be secure about their finances. Retail sales continue to be front and center as the three-month moving average of 4.6 percent over the same period a year ago confirms the strength of the economy. The pickup in small business outlook endorses the upbeat consumer sentiment. The National Federation of Independent Business Small Business Optimism Index jumped in May to 107.8, its second-highest level on record, as more Main Street business owners indicated it was a good time for hiring and capital spending.

Of course, these developments are not going unnoticed by the Federal Reserve. Consistent with the solid economic environment, the Fed hiked the Fed Funds rate for the second time this year by one-quarter of a percentage point and revised its interest rate projections. Chairman Jerome Powell said the U.S. economy “is in great shape.” Moreover, Powell’s positive assessment likely signals more short-term interest rate hikes this year than previously expected. While the Fed expects the job market to remain strong, it also acknowledged that inflation has moved up from unusually low readings toward the Fed’s 2 percent goal. With unemployment at nearly a 50-year low, there is a concern that inflation could accelerate sharply because growth could be too strong. Thus, as Powell stated, “a gradual approach for increasing the federal funds rate will best promote a sustained expansion of economic activity.”

Interest rates are lower than they should be for an economic expansion of this duration and strength and it will be a tricky tightrope for the Fed’s gradual approach to walk up rates. While the recession might be a distant memory, the Fed is very cognizant that raising rates too slowly might develop into the environment of 10 years ago when low rates were left in place too long and were partly to blame for the financial crisis. To avoid a repeat of that situation, they want to be in a position to avoid tightening abruptly down the road in response to an unexpectedly sharp increase in inflation or financial excesses that could forestall the economic expansion. On the contrary, by increasing interest rates too rapidly, the economy could weaken, and inflation could continue to run persistently below the Fed’s objective. 

The consumer has been the primary driver of the economic growth of this expansion, helped by the use of credit. With higher rates on the horizon, debt service payments will correspondingly rise for consumer revolving credit products (credit cards and auto loans) and could stall growth and cause a hit to consumer confidence. Even though rising rates can stretch consumers and their ability to spend, they are not necessarily a major threat. Household financial conditions are currently solid enough to withstand higher borrowing costs.

Download this month’s report, which includes the following charts and highlights:

  • Consumer sentiment
  • Household net worth
  • Jobs
  • Retail employment
  • Consumer credit
  • Consumer price index
  • Housing
  • Leading economic index