August 18 Gus Faucher Stuart Hoffman William Adams Kurt Rankin Chief Economist Senior Economic Advisor Senior Economist Economist Executive Summary Excellent Second Quarter Growth as Labor Market Continues to Strengthen The U.S. economy grew. percent at an annual rate in the second quarter of 18, the best quarter in almost four years. On a year-over-year basis real GDP growth was. percent in the second quarter, the best pace since the first half of 15. After a lackluster first quarter consumer spending grew. percent in the second quarter, adding. percentage points to growth. Private business fixed investment rose a very strong 8.5 percent in the second quarter, adding 1.1 percentage points to growth. Net exports were another big contributor, adding 1. percentage points to growth, as exports grew more than percent (annualized) in the quarter. However, much of the increase in exports came as China imported soybeans ahead of increased tariffs, with exports set to decline in the third quarter. The U.S. economy added 157, jobs in July; the private sector added 17, jobs over the month, with government employment down by 1,. There was a large upward revision to job growth in the prior two months of a combined 5,. The U.S. economy has added an average of 15, jobs per month so far in 18, well above last year s pace of 18,. After rising. percentage point in June the unemployment rate fell.1 percentage point in July to. percent; except for May, this is the lowest the unemployment rate has been since the end of. The broader U- unemployment rate (unemployed, underemployed and too discouraged to look for a job) fell. percentage point in July to a new cyclical low of 7.5 percent; it has not been this low since the spring of 1. In an August speech at the annual Jackson Hole monetary policy conference, Federal Reserve Chair Powell argued that the central bank s current monetary policy is appropriate. Powell pointed out the risks of moving too aggressively in tightening monetary policy causing a recession, and too slowly causing the economy to overheat. Powell said that current inflation may no longer be the first or best indicator of a tight labor market and rising pressures on resource utilization. Instead, he mentioned destabilizing excesses in financial markets may now be the best signal that the economy is overheating, citing in particular the past two recessions. Powell then said that risk management suggests looking beyond inflation for signs of excesses. Powell s speech supports further gradual increases in the federal funds rate, consistent with PNC s forecast. Baseline U.S. Economic Outlook, Summary Table* 1Q'18a Q'18p Q'18f Q'18f 1Q'1f Q'1f Q'1f Q'1f 17a 18f 1f f Output & Prices Real GDP (Chained 1 Billions $ ) 18 1857 1881 188 1871 18 17 11 1851 1858 11 1 Percent Change Annualized..1.8...7..... 1.8 CPI (18-8 = 1 ). 5.5 51. 5.7 5.1 55.7 57. 58.7 5.1 51. 5.. Percent Change Annualized.5 1.7.1.....1... Labor Markets Payroll Jobs (Millions ) 18.1 18.7 1. 1.7 15.1 15. 15.7 151. 1. 18. 15. 151. Percent Change Annualized 1.7 1.8 1. 1.1.8.8. 1. 1. 1.1.5 Unemployment Rate (Percent ).1..8..5.5.5.5..8.5.7 Interest Rates (Percent) Federal Funds 1.7 1.7.1...8.75 1. 1.8.5.75 Treasury Note, 1-year.7...7.1.18.1.1...15.1 a = actual f = forecast p = preliminary * Please see the Expanded Table for more forecast series.
11 1 Chart 1: Upward Revision to Saving Rate Good News for Near-Term Consumer Spending Saving rate, % of personal disposable income 5 Chart : Job Growth Continues to Average Around, Per Month Establishment Survey Household Survey 8 After revision 7 1 5 Before revision -1 '1 '11 '1 '1 '1 '15 '1 '17 '18 - Monthly Change in Employment (-month MA, ths.) - '1 '1 '15 '1 '17 '18 With Big Upward Revision to Saving Rate, Consumers Will Continue to Push the Economy Forward Consumer spending accounts for two-thirds of economic activity in the United States. For the past four years consumer spending has been leading overall economic growth, and the ability of households to increase their purchases is vitally important for a continuation of the current expansion. One recent concern was that a need to increase saving could constrain near-term consumer spending growth. But recent upward revisions to personal income and the saving rate are good news for household finances, consumer spending, and the economic expansion. In the first half of 18 the fundamentals for consumer spending were generally positive. The economy was adding jobs at a pace of around, per month and the unemployment rate was near a four-decade low. Wage growth, although still disappointing, was accelerating. Personal income tax cuts passed at the end of 17 boosted paychecks. Household wealth was increasing thanks to record-high stock prices and rising home values; higher dividends were also a positive for stock-owning consumers. And by limiting borrowing households had historically low levels of debt as a share of after-tax incomes. But one concern was the apparent need for households to save more. The saving rate, which was almost percent in 1, appeared to have fallen to around percent in early 18. (The saving rate is calculated as households after-tax income minus their spending, as a share of after-tax income.) Over the longer run households would need to boost their saving, which would mean that consumer spending would have to grow more slowly than after-tax income, constraining household purchases and overall economic growth. But revisions to personal income and the saving rate, released by the Bureau of Economic Analysis this summer, have dramatically changed this picture. There were large upward revisions to personal income from 1 on. In 17, the level of personal income was revised higher by. percent compared to pre-revision estimates. Annual growth in inflation-adjusted after-tax income from 1 to 17 was revised up to. percent, from 1.8 percent. With the upward revision to personal income over the past five years the saving rate was also revised higher; the reported rate doubled in 17 to.7 percent (see Chart 1). With the higher saving rate consumers are in good financial shape and can thus increase their spending roughly in line with their incomes. And with the saving rate well above where it was during the previous expansion in the early and mid-s, households have much more of a financial cushion should the economy start to slow. There are still some negatives for consumer spending in the second half of 18 and into 1. Rising interest rates are making borrowing more expensive and banks have also tightened credit standards recently; these factors will weigh on purchases of bigticket items such as cars, appliances, and vacations. Higher gasoline prices this year have constrained spending on other goods and services. Tariffs imposed by the Trump administration have already raised prices on some consumer goods, and there is talk of additional tariffs that would further boost prices and crimp spending. But the positives of an improving labor market and rising household wealth should outweigh these negatives. According to the Conference Board, consumer confidence in August was at a cyclical high, with especially strong results for expected purchases. With consumers in good shape the U.S. economic expansion will continue through the rest of this year and at least through mid- 1. Real U.S. GDP growth will be above percent annualized in the second half of 18 and early 1. Business investment and consumer spending will both get boosts from the tax cuts, and the housing market will gradually improve despite higher mortgage rates. A large increase in federal government spending will also be 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 in 1 as fiscal stimulus wears off. Monthly job growth this year will average close to,, and the unemployment rate will move lower, to around.5 percent by the end of the year. The Federal Open Market Committee will raise the federal funds rate at its next meeting, on September, to a range of. to.5 percent.
Chart : Excellent Growth in the Second Quarter Real GDP, annualized % change 5 1-1 - '1 '15 '1 '17 '18....8.. 1. Chart : After June Increase, Unemployment Rate Falls Again in July Unemployment rate, % (R) Avg. hourly earnings, % change year ago (L) 1. '8 ' '1 '11 '1 '1 '1 '15 '1 '17 '18 1..5. 8.5 8. 7.5 7..5. 5.5 5..5..5 1.8 1. 1. 1. 1..8.... -. -. -. -.8 Chart 5: Industrial Sector Has Been Steadily Improving for a Year 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 8. 7.5 7. 78.5 78. 77.5 77. 7.5 7. 75.5 75. 7.5 Chart : Construction Job Growth Is Picking Up 7..5. 5.5 Employment, % change year ago Construction Manufacturing Services, ex-government 5..5..5..5. 1..5. -.5-1. '1 '1 '1 '15 '1 '17 '18 Chart 7: House Price Growth May Be Leveling Off 1 % change year ago 1 Case-Shiller (-city) 1 1 8 - - - FHFA purchase-only -8 '1 '11 '1 '1 '1 '15 '1 '17 '18 5, 5,,8,,,,,8, Chart 8: Slowdown in Home Sales Unlikely to Persist, Existing single-family home sales, annual rate, ths. (L), New single-family home sales,, annual rate, ths. (R) '1 '11 '1 '1 '1 '15 '1 '17 '18 75 7 5 55 5 5 5 5
Chart : More Construction Workers Will Boost Homebuilding 1,5 Seasonally adjusted annualized rate, ths. 1, Permits Starts Completions 1,5 1, 1,5 1, 1,15 1,1 1,5 1, 5 85 8 75 7 5 '1 '15 '1 '17 '18.5..5..5. 1..5. -.5-1. - -. -.5 -. -.5 -. -.5 Chart 1: Gradual Acceleration in Inflation Should Not Worry Fed Finished goods PPI CPI Core CPI % change year ago '1 '15 '1 '17 '18 1 1 1 Chart 11: Higher Gasoline Prices in 18 a Negative for Consumers.5..75 Chart 1: Solid Growth in Retail Sales in 18.1 Retail sales, % change 1.8 11.5 1. 1.5. 8 7 5 Brent Crude Oil, $/BBL (L) Unleaded Gasoline, $/gal (R) ' '7 '8 ' '1 '11 '1 '1 '1 '15 '1 '17 '18..75.5.5. 1.75... -. -. Total -. Ex-auto -1. Ex-auto, gasoline - '15 '1 '17 '18 1 18 17 1 15 1 1 1 11 1 Chart 1: Light Vehicle Sales Continue to Run at Around 17 Million Auto and light truck sales (domestic & foreign) Auto and light truck assemblies (domestic only) '15 '1 '17 '18 Mil., annualized rate 18 15 1 Chart 1: Few Signs of Household Economic Stress Household Economic Stress Index HESI = Unemployment rate + CPI inflation house price growth - Note: PNC calculates HESI with the Case-Shiller - City Composite HPI - '1 '11 '1 '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.
1Q'18a Q'18p Q'18f Q'18f 1Q'1f Q'1f Q'1f Q'1f 17a 18f 1f f Output Nominal GDP (Billions $ ) 1 8 5 1 18 17 1 185 51 1 55 Percent Change Annualized. 7. 5.5 5. 5. 5.1.7.. 5. 5.. Real GDP (Chained 1 Billions $ ) 18 1857 1881 188 1871 18 17 11 1851 1858 11 1 Percent Change Annualized..1.8...7..... 1.8 Pers. Consumption Expenditures 17 188 11 1 17 11 118 15 155 187 115 17 Percent Change Annualized.5...5.. 1. 1.8.5.5. 1.8 Nonresidential Fixed Investment 5 71 75 7 8 8 81 15 58 7 87 5 Percent Change Annualized 1 7...8 5...1. 5. 7. 5..8 Residential Investment 15 1 18 1 7 1 5 11 18 5 Percent Change Annualized -. -1.1.5....8.. 1.1.. Change in Private Inventories -8 5 55 51 1 51 Net Exports - -85-875 -8-1 - - -5-85 -88 - - Government Expenditures 15 1 1 5 57 8 1 15 1 18 88 7 Percent Change Annualized.1..5...5 1.7 -.1 1.7. 1. Industrial Prod. Index (1 = 1 ) 15. 17.5 18. 18.7 1. 1.8 11.1 1.7 17. 1.7 11.7 Percent Change Annualized...7.1 1.7 1. 1.1. 1..7.. Capacity Utilization (Percent ) 77. 77. 78. 78. 78. 78.8 78.8 7. 7.1 77. 78.8 7. Prices CPI (18-8 = 1 ). 5.5 51. 5.7 5.1 55.7 57. 58.7 5.1 51. 5.. Percent Change Annualized.5 1.7.1.....1... Core CPI Index (18-8 = 1) 55.7 5. 58. 5.7 1..8.5.1 5. 57..7 7. Percent Change Annualized. 1.8.1...5.5.5 1.8... PCE Price Index (1 = 1 ) 17.5 18. 18. 18. 11.1 11.7 111. 1.1 18. 11. 11.8 Percent Change Annualized.5 1.8 1...1... 1.8... Core PCE Price Index (1 = 1 ) 1. 1.8 11. 11. 111. 11. 11.8 1 18. 11.1 1 115. Percent Change Annualized...1..... 1.... GDP Price Index (1 = 1 ) 1. 11. 11.7 111. 111. 11. 11. 11. 17. 11. 11. 115. Percent Change Annualized.. 1.7.1.... 1.... Crude Oil, WTI ($/Barrel ). 8.1.5. 7. 7. 71.8 7.7 5.8 7. 71. 7. Labor Markets Payroll Jobs (Millions ) 18.1 18.7 1. 1.7 15.1 15. 15.7 151. 1. 18. 15. 151. Percent Change Annualized 1.7 1.8 1. 1.1.8.8. 1. 1. 1.1.5 Unemployment Rate (Percent ).1..8..5.5.5.5..8.5.7 Average Weekly Hours, Prod. Works..7.8.8......7.8.. Personal Income Average Hourly Earnings ($ )..57.75..1..51.7.5..1.17 Percent Change Annualized.8.........8.. Real Disp. Income (1 Billions $ ) 11 1 15 187 17 1 17 158 1 11 17 1 Percent Change Annualized.. 1.1 1. 1.1 1.1.... 1.1 1. Housing Housing Starts (Ths., Ann. Rate ) 117 1 18 1 11 17 155 11 18 1 18 17 Ext. Home Sales (Ths., Ann Rate ) 557 51 557 55 55 588 571 577 55 55 58 578 New SF Home Sales (Ths., Ann Rate ) 5 58 7 85 1 58 7 Case/Shiller HPI (Jan. = 1 ) 1.8...5 8.5 1. 1. 1. 11.. 11.1 1. Percent Change Year Ago... 5...1.8. 5.8...5 Consumer Household Economic Stress Index..1.1. 1.1 1...5.. 1.8.5 Auto Sales (Millions ) 17.1 17. 17. 17. 17.1 17.1 17. 17. 17.1 17. 17.1 1. Consumer Credit (Billions $ ) 8 8 5 15 11 7 755 55 1 Percent Change Annualized..7..1. 5. 5.8 5.1 5. 5. 5..8 Interest Rates (Percent) Prime Rate.5.8 5. 5.5 5. 5.1 5.75 5.75.1. 5. 5.75 Federal Funds 1.7 1.7.1...8.75 1. 1.8.5.75 -Month Treasury Bill 8 1.87 1..7.5.8.5..5 1.88..1 1-Year Treasury Note.7...7.1.18.1.1...15.1 -Year Fixed Mortgage.7.5..71.77.8.8.75..5.7.7 a = actual f = forecast p = preliminary Baseline U.S. Economic Outlook, Expanded Table PNC Economics Group August, 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.