The economy has warmed up as the heat of the summer weather has begun, hitting what appears to be full employment and probably growing at or near its potential. June payrolls increased by 222,000 jobs, registering a three-month moving average increase of 194,000 jobs — an unsustainable pace, since it is faster than the growth of working-age entrants to the job market. June’s unemployment rate edged up a notch to 4.4 percent, due to an increasing number of people pulled back into the labor force who were not previously looking for a job, rather than weaker conditions.
The job openings and labor turnover data released by the Bureau of Labor Statistics tells a positive story. There were 5.7 million job openings as of the last business day of May, hires increased to 5.5 million and separations increased to 5.3 million. Overall retail jobs picked up in June and job openings rose by 72,000, the most significant monthly gain in 18 months. The labor market remained healthy and continued to show workers’ confidence through their willingness to leave one job for another.
The economy is expected to advance at a pace of at least 2 percent for the remainder of 2017, putting it technically above its potential. (Potential output is the maximum amount of goods and services the economy can produce when it is at full capacity.) Earlier this year, the Congressional Budget Office published its baseline projections for the economy. The CBO projects an increase in real (inflation-adjusted) potential output of 1.9 percent for the year. Although potential output is difficult to measure, it plays a central role in guiding monetary policy. When unemployment falls and actual output exceeds potential, prices should rise since more workers with jobs will increase spending and create upward pressure on inflation and wages.
Federal Reserve officials use potential output to gauge the pace of inflation and decide on policy. They are currently attempting to “normalize” interest rates (get the short-term Fed Funds rate up to a normal 3 percent level from the current 1.25 percent) while the economy is in fundamentally solid shape. But U.S. unemployment is near its 16-year low (below what many economists consider full employment), inflation is stubbornly below the Fed’s 2 percent target for the last several months and wage growth is significantly below what is normally evident at full employment. This situation has become a vexing problem for the Fed, and these unusual developments will remain center stage for the second half of the year. The critical question facing Fed officials is whether to raise rates in anticipation of inflation yet to come or to wait to see inflation move up before taking action. Our view is that lower inflation is expected in the near term and suggests that the next rate hike will be in December.
What does this mean for retail? Unfortunately, deflating prices will continue to aggravate measurement of spending and will put further pressure on retail profits. While consumers continue to buy, they have not been using the money they are saving to make additional purchases. Nonetheless, consumer fundamentals are solid with no expectations for spending to cool off in the remainder of the summer.
Download this month’s report, which includes the following charts and highlights:
- Consumer sentiment
- GDP Growth
- Consumer price index
- Consumer spending
- Leading economic index
- Consumer credit