At the Turn

The year began with two key themes. The first was that the economy ended 2017 with a good deal of momentum that should have continued into early 2018. The second was that the outlook for the second half of the year was considerably more clouded, reflecting fiscal stimulus, more binding constraints in the labor market, and tighter monetary policy. As is often the case, the economy was mixed in the first half of 2018, but remains in generally good shape. Growth is expected to slow in the second half of the year, but remain moderately strong. At the same time, the odds of recession for 2019 or 2020 have ticked up.

Comprehensive benchmark revisions to the National Income and Product Accounts are set to be released on July 27 (along with the advance GDP estimate for 2Q18). This revision will further address the issue of residual seasonality (the fact that first quarter GDP growth has been significantly less than the average for the other three quarters of the year), likely shifting recent GDP growth figures around. As usual, investors place far too much emphasis on the headline GDP figure. Focus on the meat and potatoes.

Consumer spending accounts for 69% of GDP. Quarterly figures are often lumpy – strong one quarter, softer the next. This appears to have been the case in recent quarters. “Soft” first quarter figures were widely expected to be followed by stronger second quarter numbers. Indeed, personal spending data through May suggest an inflation-adjusted annual rate of 2.5-3.0% in 2Q18 (vs.

+0.9% in 1Q18 and +4.0% in 4Q17). That’s relatively strong, but it’s less than earlier expectations of a sharper rebound. Nominal wage growth has picked up, but that has been largely offset by higher inflation over the last 12 months.

Chart 1

Click here to enlarge

Chart 2

Click here to enlarge