Just Rolling Along
A really solid GDP report sets us up for this coming Friday’s employment release, which should continue the run of good economic news. The economy is performing very well. So it also makes sense for the Fed to continue to hike interest rates slowly, which suggests they will make no changes to policy at the meeting this week. But hikes are likely at the September and December confabs. The economy just keeps rolling along.
The 4.1% rise in the second quarter GDP report is markedly stronger than is sustainable longer term, political claims notwithstanding. That should become more evident with the employment report on Friday. While the labor force participation rate has edged higher over the past few months, supplying some additional workers to the job market, demographic trends severely limit the potential gains. At the same time, the appetite of firms to hire workers remains unfulfilled, even as the number of job vacancies keeps increasing. Consensus estimates expect a 0.1 percentage point decline in the unemployment rate, but a larger decline is coming sometime soon, because the reported unemployment rate declined unusually slowly over the past year, even as hiring was solid. The risk of a larger fall is high, as the data surveys catch up to the economy.
The 4.1% rise in GDP is almost shocking after years of the economy stuck at around a 2% growth rate. Details within the report reveal that the quarter was actually quite solid. Inventories declined during the quarter, so production should rise a bit more to refill stocks. Final sales were extremely strong at 5.1%, led by households, which increased outlays at a 4.0% annual rate. It may be that some of the strength of the second quarter was simply a rebound off a soggy first quarter. But the household savings rate is now estimated at 6.8%, so households have plenty of financial firepower to keep spending. And with solid job growth and some moderate acceleration in wage rates due to the tight labor market, household incomes should continue to perform quite well, further improving the ability of households to boost outlays.
It is hard to discern what’s really happening to exports and imports. U.S. exports were very strong, possibly bolstered by increased sales to get in ahead of tariffs on such as items like soybeans. But imports may also be distorted by foreigners trying to get ahead of increased tariffs on U.S. imports. There is far less ambiguity with respect to domestic nonresidential investment, which remains solid. With hiring likely to remain robust in the face of so many job vacancies, economic growth above trend remains highly likely, even if it moderates below 4%. Enjoy the ride.
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