December 18 Gus Faucher Stuart Hoffman William Adams Kurt Rankin Abbey Omodunbi Chief Economist Senior Economic Advisor Senior Economist Economist Economist Executive Summary Continued Solid Job Growth; Fed Raises Rates to Close out 18 The U.S. economy added 155, jobs in November, after a gain of 7, in October. Job growth has averaged, per month so far in 18, up from 18, per month in 17. Goods-producing industries added 9, jobs in November, after a big increase of 5, in October. Private service-providing industries added, jobs for the month, while there were job losses of, in government. The unemployment rate held steady at.7 percent in November for a third straight month, the lowest since 199. With the tight labor market employers are boosting pay. Average hourly earnings were up.1 percent in November from one year earlier, the same rate as in October; wages are growing at their fastest pace since 9. As expected, the Federal Open Market Committee raised the federal funds rate by one-quarter of a percentage point on December 19, to a range of.5 to.5 percent. The decision was unanimous. This was the fourth increase this year (every other FOMC meeting). The FOMC has been gradually raising the fed funds rate from a near-zero level since late 15. In its forward-looking section, the FOMC statement said that the Committee judges that some further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric percent objective over the medium term. The addition of the word some to the statement in December suggests that while the FOMC expects to continue raising the rate fed funds rate in 19, it may be approaching the end of its tightening cycle. The language on current economic conditions was unchanged from the previous statement, on November 8, and was quite positive, despite recent stock market volatility. Oil prices are falling at the end of 18, down to around $5 for a barrel of West Texas Intermediate crude, from $7 in early October. Increased U.S. production in response to higher prices earlier this year, slightly slower global economic growth, and the decision by the Trump administration to grant waivers to major importers of Iranian oil have all pushed down oil prices. The big drop in oil prices will slow inflation in late 18 and early 19, giving the FOMC more leeway to keep interest rates low and support economic growth. Baseline U.S. Economic Outlook, Summary Table* 1Q'18a Q'18a Q'18p Q'18f 1Q'19f Q'19f Q'19f Q'19f 17a 18f 19f f Output & Prices Real GDP (Chained Billions $ ) 18 185 187 1875 1891 198 1915 197 1851 1858 198 1958 Percent Change Annualized...5..9.7.7...9.8. CPI (198-8 = 1 ) 9. 5.5 51.7 5. 5.1 5.7 5. 58. 5.1 5.9 55.5 1.9 Percent Change Annualized.5 1.7..5 1.8.5...1. 1.8.5 Labor Markets Payroll Jobs (Millions ) 18.1 18.7 19. 19.9 15. 15.9 151. 151.8 1. 19. 151.1 15. Percent Change Annualized 1.7 1.7 1.7 1. 1. 1. 1. 1.1 1. 1. 1. 1. Unemployment Rate (Percent ).1.9.8.7..5....9.5.5 Interest Rates (Percent) Federal Funds 1.5 1.7 1.9.1.8.1..88 1. 1.8.58.88 Treasury Note, 1-year.7.9.9..5.5....9.5.9 a = actual f = forecast p = preliminary * Please see the Expanded Table for more forecast series.
5 1-1 Job Growth Remains Solid at the End of 18 Establishment Survey Household Survey - Monthly Change in Employment (-month MA, ths.) - '1 '1 '15 '1 '17 '18 5 1-1 - Growth to Temporarily Slow in Fourth Quarter from Inventories Real GDP, annualized % change '1 '15 '1 '17 '18 Holiday Spending Set to Grow at Fastest Pace Since Before Great Recession Consumer spending will close out 18 on a strong footing, with holiday sales growth of around.5 percent compared to last year. This would be the fastest pace since 7, right before the start of the Great Recession. However, much of the growth will take place at online retailers; gains at traditional brick-and-mortar retailers will be much smaller. The fundamentals for consumers at the end of 18 are excellent. Job growth is solid at around, per month, and has picked up somewhat this year. With the unemployment rate at.7 percent, the lowest it has been since 199, firms are responding to the tight job market by boosting pay. Average hourly earnings were up.1 percent in October and November from one year earlier, the fastest wage growth since the job market was imploding in early 9. Before-tax income is up more than percent in late 18 from one year earlier. The personal income tax cut Congress passed at the end of 17 is also a positive for holiday spending. Personal tax payments are up less than 1 percent in late 18 from last year, well below income growth. As a result after-tax incomes are growing at a robust year-over-year pace of almost 5 percent at the end of 18. Low inflation, particularly falling energy prices, is also providing a boost to holiday sales. The price of a gallon of unleaded gasoline has fallen to around $. in mid-december, its lowest in more than a year, and is down around 1 percent from one year ago. Other prices are rising only slowly. As a result after-tax income, adjusted for inflation, is up almost percent in late 18 from one year ago. There are some negatives for holiday spending this year. Stock market volatility may cause wealthier households to turn more cautious in their purchases, and the unsettled political outlook and concern over tariffs may also be drags. Higher interest rates that make it more expensive to borrow for big-ticket items are also a negative for holiday sales. Consumer confidence fell slightly in November, according to the Conference Board, but remained near its highest levels since. Although there are some negatives for holiday spending, the outlook is bright. Holiday sales should be up around.5 percent this year, after a gain of about percent in 17. This would be the fastest sales growth since 7, before the Great Recession. About.5 percentage points of the increase will come from higher unit sales, with about percentage points from higher prices. However, the composition of purchases will continue to shift, moving away from traditional retail stores and toward online sellers. Traditional retailers will eke out a small increase in sales this year of around percent, while online sellers will enjoy another year of doubledigit growth. With a strong holiday season consumer spending will continue to drive economic growth at the end of 18. However, fourth quarter growth will slow somewhat from its strong pace in mid-18 because of a cutback in business inventory accumulation. Growth will then pick back up in the first half of 19, to close to percent on an annualized basis. Business investment and consumer spending are both getting boosts from tax cuts; a large increase in federal government spending is also a near-term positive. Assuming no significant disruptions trade will be a slight negative as growth in imports is stronger than growth in exports. Growth will slow over the course of 19 as fiscal stimulus wears off. After averaging slightly above, in 18, monthly job growth will slow to around 15, in 19 because of the tight labor market. The unemployment rate will continue to move lower, to around. percent by the end of next year. To contain inflation the Federal Open Market Committee will continue with gradual rate increases in 19; PNC expects two next year, down from four this year. With a big drop in energy prices inflation will slow in the near term, and then gradually return to the Federal Reserve s objective of percent.
....8.. 1. Tight Job Market Will Push Wages Higher in 19 Unemployment rate, % (R) Avg. hourly earnings, % change year ago (L) '8 '9 '1 '11 ' '1 '1 '15 '1 '17 '18 1 9.5 9. 8.5 8. 7.5 7..5. 5.5 5..5..5 Industrial Sector Supporting U.S. Growth in Late 18 1.8 1. 1. 1..8... -. -. -. -.8 Capacity utilization, % (R) Industrial production, % change (L) -1. '1 A J O '15 A J O '1 A J O '17 A J O '18 A J O 8 79.5 79. 78.5 78. 77.5 77. 7.5 7. 75.5 75. 7.5 Construction and Manufacturing Are Outpacing Services 7..5. 5.5 Employment, % change year ago Construction Manufacturing Services, ex-government 5..5..5..5. 1..5 -.5-1. ' '1 '1 '15 '1 '17 '18 House Price Growth Set to Slow Further in 19 1 % change year ago 1 Case-Shiller (-city) 1 8 - - - FHFA purchase-only -8 '1 '11 ' '1 '1 '15 '1 '17 '18 5, 5,,8,,,,,8, Higher Mortgage Rates Are Weighing on Home Sales, Existing single-family home sales, annual rate, ths. (L), New single-family home sales,, annual rate, ths. (R) '1 '11 ' '1 '1 '15 '1 '17 '18 75 7 5 55 5 5 5 5 Homebuilding May Be Picking Back Up in Late 18 1,5 Seasonally adjusted annualized rate, ths. 1, Permits Starts Completions 1,5 1, 1,5 1, 1,15 1,1 1,5 1, 95 9 85 8 75 7 5 '1 '15 '1 '17 '18
.5..5..5. 1..5 -.5-1. - -. -.5 -. -.5 -. -.5 Recent Big Drop in Energy Prices Will Slow Inflation in the Near Term Finished goods PPI CPI Core CPI % change year ago '1 '15 '1 '17 '18 1 1 11 1 9 8 7 5 Drop in Gasoline Prices in Late 18 a Positive for Consumers Brent Crude Oil, $/BBL (L) Unleaded Gasoline, $/gal (R) ' '7 '8 '9 '1 '11 ' '1 '1 '15 '1 '17 '18.5..75.5.5..75.5.5. 1.75.8.7 % change Higher Personal Income Means Higher Consumer Spending.1 1.8 After Soft August and September, Retail Sales Have Bounced Back Retail sales, % change..5..9.....1 -. -.1 -. Real after-tax income -. Real pers. consumption expenditure -. '15 A J O '1 A J O '17 A J O '18 A J O Auto Sales Continue to Best 17 Million Per Year Auto and light truck sales (domestic & foreign) Mil., annualized rate 19 Auto and light truck assemblies (domestic only) 18 17 1 15 1 1 -. Total -.9 Ex-auto - Ex-auto, gasoline - '15 '1 '17 '18 Households Remain in Good Financial Shape 18 15 9 Household Economic Stress Index HESI = Unemployment rate + CPI inflation house price growth 11 1 9 '15 '1 '17 '18 - '1 '11 ' '1 '1 '15 '1 '17 '18 Disclaimer: The material presented is of a general nature and does not constitute the provision of investment or economic advice to any person, or a recommendation to buy or sell any security or adopt any investment strategy. Opinions and forecasts expressed herein are subject to change without notice. Relevant information was obtained from sources deemed reliable. Such information is not guaranteed as to its accuracy. You should seek the advice of an investment professional to tailor a financial plan to your particular needs. 18 The PNC Financial Services Group, Inc. All rights reserved. - Note: PNC calculates HESI with the Case-Shiller - City Composite HPI
1Q'18a Q'18a Q'18p Q'18f 1Q'19f Q'19f Q'19f Q'19f 17a 18f 19f f Output Nominal GDP (Billions $ ) 1 819 1 1 1581 18 1985 8 15 9 Percent Change Annualized. 7. 5..1.8.8 5.1.5. 5.1.7. Real GDP (Chained Billions $ ) 18 185 187 1875 1891 198 1915 197 1851 1858 198 1958 Percent Change Annualized...5..9.7.7...9.8. Pers. Consumption Expenditures 7 8 957 179 115 1 9 11 559 9 57 1517 Percent Change Annualized.5.8..8....1.5.7.8. Nonresidential Fixed Investment 5 71 77 757 791 81 88 871 58 7 8 9 Percent Change Annualized 1 8.7.5.5 5...9. 5..9.5.8 Residential Investment 15 1 9 11 1 15 17 11 1 Percent Change Annualized -. -1. -. 1. 1..5 1.7.1...7.1 Change in Private Inventories -7 87 1 5 5 8 Net Exports -9-81 -9-979 -99-1 -11-119 -859-917 -1 - Government Expenditures 15 17 19 8 59 8 17 1 18 9 Percent Change Annualized.5..5.9.9. 1.7 -.1 1.8. Industrial Prod. Index ( = 1 ) 15.9 17. 18.5 19.9 11. 11 111.8 1. 1.7 17.9 11 11.1 Percent Change Annualized.5 5..7 5.1.5..1 1.7 1..1. 1. Capacity Utilization (Percent ) 77. 77.8 78. 79. 79.7 8. 8. 8.9 7.1 78. 8. 8 Prices CPI (198-8 = 1 ) 9. 5.5 51.7 5. 5.1 5.7 5. 58. 5.1 5.9 55.5 1.9 Percent Change Annualized.5 1.7..5 1.8.5...1. 1.8.5 Core CPI Index (198-8 = 1) 55.7 5.9 58. 59.5 1..5. 5.5 5. 57.. 9. Percent Change Annualized. 1.8..1.... 1.8.1.. PCE Price Index ( = 1 ) 17.5 18.1 18.5 18. 19. 19. 11. 11.9 1.1 18.1 19.9 1. Percent Change Annualized.5....5. 1.8. 1.. Core PCE Price Index ( = 1 ) 19. 19.8 1 11.7 111. 111.8 1.5 11. 18. 11 11.5 Percent Change Annualized..1 1.8..1..1 1. 1.9..1 GDP Price Index ( = 1 ) 19. 11. 11.7 111. 11 1. 1.7 11. 17.9 11. 1. 115. Percent Change Annualized.. 1. 1.1 1.9.1.5.5 1.9. 1.9.5 Crude Oil, WTI ($/Barrel ).9 8.1 9.7 59. 58. 59.7 1.1. 5.8 5... Labor Markets Payroll Jobs (Millions ) 18.1 18.7 19. 19.9 15. 15.9 151. 151.8 1. 19. 151.1 15. Percent Change Annualized 1.7 1.7 1.7 1. 1. 1. 1. 1.1 1. 1. 1. 1. Unemployment Rate (Percent ).1.9.8.7..5....9.5.5 Average Weekly Hours, Prod. Works..7.8.8.8.8.8.8.8.7.8.8.8 Personal Income Average Hourly Earnings ($ )..58.75.9...51.7.5..1.18 Percent Change Annualized.8..1.......8.. Real Disp. Income ( Billions $ ) 19 8 15 17 151 157 115 157 199 1 159 1787 Percent Change Annualized. 1.8..9 1.8 1.1..8 1.8 1. Housing Housing Starts (Ths., Ann. Rate ) 117 1 5 5 7 8 9 8 7 111 Ext. Home Sales (Ths., Ann Rate ) 557 51 57 575 55 579 559 55 55 59 59 5 New SF Home Sales (Ths., Ann Rate ) 5 598 59 59 1 5 7 1 Case/Shiller HPI (Jan. = 1 ) 199.7 1.9.. 5.7.7 7.8 8.9 191..5 7. 11.8 Percent Change Year Ago.. 5.7.....1 5.8 5.7.. Consumer Household Economic Stress Index..7 1..1.8...7.5..8 Auto Sales (Millions ) 17.1 17. 1.9 17.5 17. 17.1 17.1 17. 17.1 17. 17.1 1.9 Consumer Credit (Billions $ ) 8 899 95 8 5 15 755 99 15 77 Percent Change Annualized..8 5. 5.5.1..9. 5...5. Interest Rates (Percent) Prime Rate.5.8 5.1 5.8 5.5 5.5 5.78..1.9 5.7. Federal Funds 1.5 1.7 1.9.1.8.1..88 1. 1.8.58.88 -Month Treasury Bill 8 1.87.7...5.7.79.95 1.97..87 1-Year Treasury Note.7.9.9..5.5....9.5.9 -Year Fixed Mortgage.7.5.57.91 5. 5..99.99.99.57 5..9 a = actual f = forecast p = preliminary Baseline U.S. Economic Outlook, Expanded Table PNC Economics Group December, 18 Disclaimer: The material presented is of a general nature and does not constitute the provision of investment or economic advice to any person, or a recommendation to buy or sell any security or adopt any investment strategy. Opinions and forecasts expressed herein are subject to change without notice. Relevant information was obtained from sources deemed reliable. Such information is not guaranteed as to its accuracy. You should seek the advice of an investment professional to tailor a financial plan to your particular needs. 18 The PNC Financial Services Group, Inc. All rights reserved.