Warm temperatures prevail in most of the United States at the moment, a trend that is mirrored in recent economic data. We don’t expect conditions to cool as autumn approaches.

Second-quarter growth in gross domestic product (GDP) has been estimated at 2.6% on an annualized basis. This is more than twice the pace of the first quarter and brings expansion in the first half of 2017 close to the 2% level that we had projected at the start of the year. We are forecasting slightly better results during the balance of the year for reasons detailed below.

Key Economic Indicators

Key Elements of the Forecast

    • Personal consumption was a highlight of the second quarter GDP report, rising by 2.8% on annualized basis. This was a pleasant surprise to some who had become concerned at the sluggish pace of retail sales growth during the April-June period. But it is important to remember that services compose a substantial fraction of household expenditures, and many of these are not captured in the retail sales data. Wealth effects created by the exceptionally strong equity markets are certainly a strong tailwind for spending.
    • Employment was another likely contributor to the positive tone for consumers. U.S. nonfarm payrolls expanded by 209,000 in July, the fifth month this year that job creation exceeded 200,000. It bears repeating that a reading of 100,000 new positions is thought to be sufficient to keep the monthly unemployment rate steady; recent outperformance has lowered the unemployment rate to 4.3% and generated a modest increase in labor force participation.
    • The restoration of income among new job holders certainly augurs well for consumption gains during the balance of the year. For those in the workforce, wage gains remain very modest by late-expansion standards. During the past twelve months, hourly earnings have risen by just 2.5% in contrast to past upturns, when wage gains routinely exceeded 3% as the cycle aged. There have been various theories for why pay raises have been so muted, but our sense is that the labor market is getting tighter and compensation is bound to respond.