Solid growth in the second quarter — including job creation, robust consumer spending and livable inflation — appears to have provided the economy with momentum to carry it forward. While headwinds are evident, no sign of a slowdown has occurred. Consumer spending has picked up and is evident in both retail sales and hiring. Retail industry employment (excluding automotive dealers, gasoline stations and restaurants) increased by 66,000 jobs in July over the same period last year. The most recent data according to the federal Bureau of Labor Statistics showed retail job openings were at a record monthly high of 807,000 in June but that only 734,000 people were hired — showing retailers had more job openings than people to fill them. Across all industries, there were 66.6 million hires and 64.1 million separations over the past 12 months, yielding a net employment gain of 2.5 million. These new jobs generated income and spending that contributed to the recent upsurge in retail industry performance. July retail sales increased 4.9 percent unadjusted year-over-year, and sales were up 5 percent on a three-month moving average over the same period a year ago.
Even though prices have begun to pick up, the inflationary situation remains largely manageable for consumers. The headline Personal Consumption Expenditure deflator index has accelerated from 1.4 percent to 2.2 percent. The index has now met or exceeded the Federal Reserve’s 2 percent objective for four consecutive months, the first time since early 2012. The core PCE deflator, which excludes food and energy, has accelerated from 1.4 percent to 1.9 percent over the past year. Households are becoming concerned about rising prices as reported in the University of Michigan’s mid-August consumer survey. Most of the increased prices are showing up in the services sector and not necessarily in the goods/retail sector. Increased gasoline prices remain a speed bump to consumer spending. While households don’t like price increases, wage gains are taking some of the sting out of higher prices as employers are disbursing more in wages. Wage growth as measured by the Employment Cost Index rose 2.8 percent from a year earlier, the strongest gain since the third quarter of 2008. How much wage gains will increase remains an open question.
Consumers are enjoying the benefits of tax cuts and a solid level of job creation, and household balance sheets are in relatively good shape. However, as growth revved up in the second quarter, so did household debt, rising to a record $13.9 trillion. Nonetheless, debt as a share of disposable income continued to decline and, because of recent statistical revisions, the personal saving rate is now more than twice what was previously reported: 7.2 percent in the first quarter and 6.8 percent in the second. Consumer spending and credit use have been bolstered by these positive conditions. Moreover, the ratio of total required household debt payments to total disposable income is near 30-year lows. All of this implies that consumers are not over-extended and have the ability to spend without the likelihood of a debt correction cycle. In addition, it shows that income growth and not debt growth has been the key driver of household spending.
The strength in retail sales in the first half of 2018 stimulated by strong labor market conditions reinforces the positive outlook for consumer spending now that we are in the second half of 2018. In light of these positive conditions, NRF has updated its 2018 forecast. We now expect retail sales to grow a minimum of 4.5 percent over 2017 rather than the 3.8 percent to 4.4 percent range forecast earlier this year. Despite this upgrade in our forecast, uncertainty surrounding U.S. trade policy is likely to weigh slightly on gross domestic product growth and make consumers more cautious during the fall season.
Download this month’s report, which includes the following charts and highlights:
- Consumer sentiment
- Ecommerce sales
- Private payroll
- NRF sales forecast