The Week That Was

Recent economic data reports, while mixed, continued to paint a picture of a strengthening economy in 2Q18. This improvement, expected to be seen in the GDP report to be released this Friday, partly reflects a rebound from a “soft” 1Q18. Averaging the two quarters should show a robust pace of growth in the first half of the year. Comprehensive benchmark revisions are likely to shift the recent numbers around to some extent, as the Bureau of Economic Analysis will address the issue of residual seasonality (the tendency for the first quarter GDP growth figures to be lower than the average pace for the rest of the year). Still, there’s a growing cloud on the horizon. Trade policy is cited as an increasing concern, the risks of a broader trade war are growing, and the uncertainty is having a negative impact on capital spending decisions here and abroad.

First the good news. Retail sales rose about as expected in the initial estimate for June, but May figures were revised higher, pointing to a pickup in consumer spending growth in 2Q18, probably close to a 3.0% annual rate. Inflation-adjusted spending rose at a 0.9% annual rate in 1Q18, so a second quarter pickup was widely anticipated. Still, that would average to a little under a 2% pace in the first half. Job growth remains supportive. Nominal wage growth is gradually rising (2.7% for the 12 months ending in June), but gains have been offset by higher inflation (2.9%). That reflects higher gasoline prices, which will have a mixed impact (depending on how much one drives). Core inflation is around 2%, so real wages should pick up as gasoline prices stabilize.

The Federal Reserve’s measure of industrial production is rising, but manufacturing output growth has been mixed and generally unimpressive, averaging a 1.9% annual rate in the first half of the year.

Housing starts fell sharply in June, but these data are unreliable (they are reported with a gigantic amount of statistical uncertainty). Single-family permits, the key figure in the report, are still exhibiting good strength relative to last year (+6.7% y/y for 2Q18). Builders note strong demand for housing, but high building costs (including lumber, reflecting the impact of tariffs).

We are still missing foreign trade figures for June, but it looks like the trade deficit will have fallen sharply in the second quarter. Hence, net exports should make a significant positive contribution to 2Q18 GDP growth. That drop does not reflect an impact from trade policy. Quarterly trade figures are always uneven and the trade deficit widened sharply in the previous two quarters.