The U.S. economy continues to maintain solid momentum now that we are well into the second half of 2018. Second-quarter gross domestic product growth of 4.2 percent year-over-year was the strongest in almost four years and economic fundamentals are incredibly sound given the length of the current economic expansion. The National Retail Federation remains optimistic about the pace of economic activity and expects GDP will grow between 2.8 and 3.1 percent for the second half of the year. A solid third quarter is expected, with perhaps a little less momentum going into the fourth quarter.
Rarely have we seen as many economic gauges of the U.S. economy so strong, including employment, income, retail sales, business spending, manufacturing and small business. Consumer spending remains robust. Job and income growth remain exceptionally strong, and household wealth continues to set record highs. All three factors influence consumer confidence and ultimately spending. The University of Michigan’s Consumer Sentiment Index rose to 100.8 in September, the highest level in six months. As long as consumers continue to spend, the economy will stay on track to grow.
Adding to this strength have been the hearty gains in business confidence, investment spending and hiring. An enormous part of this energy is coming from the small business sector. The National Federation of Independent Business Index of Small Business Optimism rose 0.9 points to a record-high of 108.8 in July. In tandem was the Institute for Supply Management’s manufacturing index, which rose to 61.3 in August, the highest reading in 14 years. And the Conference Board’s highly respected Leading Economic Index suggests prospects for the U.S. economy are strengthening. The index rose 0.4 percent to 111.2 in August following increases of 0.7 percent in July and 0.5 percent in June.
A slight headwind for consumers has been the uncertainty surrounding rising inflation. The outlook for inflation remains modest but is expected to slow. August Consumer Price Index data showed a fall-off in inflation. Compared with a year ago, headline CPI was up 2.7 percent versus the year-over-year gain of 2.9 percent in July. Excluding the more volatile sectors of food and energy, the year-over-year gain in core CPI was to 2.2 percent in August, slightly less slow than the 2.4 percent in July. Based on current oil prices, the CPI is expected to slow through the remainder of the year. The tariff picture has significantly muddied the inflation waters and is making inflation both difficult to project and interpret. Inflation in the fourth quarter could be very trade war- and tariff-dependent.
Conventional wisdom says when interest rates rise, the cost of consumer borrowing increases and squeezes consumer spending. Interest rates are expected to edge higher as the Federal Reserve Open Market Committee undertakes further tightening. Additionally, the growth in outstanding credit card balances has been slowing for more than a year. While some reduction could be due to the tax cuts as consumer cash flow has improved and has been used to pay down balances, this slowing began prior to the passage of the tax reform legislation. The tightening in lending standards precipitated by a modest deterioration in credit quality may also explain the deceleration. According to the Fed’s most recent Senior Loan Officer Survey, banks have tightened lending standards on credit cards. Finally, this development may be due to consumers remaining pragmatic about the use of credit when making purchases. The ratio of total required household debt payments to total disposable income is near 30-year lows. This measure implies that consumers are not over-extended and have the ability to spend in the coming months.
It is too early to know Hurricane Florence’s impact on retail. The first vestiges in the data will be somewhat apparent in the Census Bureau’s retail sales numbers for September. The storm has affected small and large retailers alike. Clean-up and replacement spending will impact discretionary spending in the affected areas and will vary by retail segment. The population impacted by Florence is much smaller than last year’s Hurricane Harvey. Although the extent of the damage is still being tallied, Florence will likely have a modest impact on a number of retailers.
Download this month’s report, which includes the following charts and highlights:
- Consumer sentiment
- Payroll
- Job openings and hires
- Household wealth
- Conference board leading index
- Consumer credit
- Consumer spending and income
- Inflation