With the release of the Labor Department's June employment report, it’s time to assess how the economy is doing, six months into 2018.
Economic Growth: The current expansion (the second longest in U.S. history) got off to a slow start in 2018, but gained momentum in the second quarter. The Republican tax cut has fueled corporate spending and consumers are perking up and spending more. Most economists anticipate that the economy, as measured by Gross Domestic Product, will expand by about three percent in 2018, which would be the best showing since 2005.
Labor Market: The economy has added 215,000 jobs per month, on average in 2018, which is impressive considering that we are entering the tenth year of the recovery. The unemployment rate, which dropped to an 18-year low of 3.8 percent in May, stands at 4 percent as of June, as more workers entered the labor force. The broader rate (U-6) has fallen to 7.8 percent and for the first time in almost 50 years, there are now more job openings than there are unemployed Americans. The one sore spot of the labor landscape is annual wage growth, which has remained mired in a range of 2.6/2.9 percent. Wages haven’t grown above 3 percent from a year earlier since 2009, but as the quality of jobs improves, economist believe that by the end of the year, workers should see that magical 3 percent number.
Federal Reserve Rate Hikes: The Federal Reserve, under the new Chief Jerome Powell, has followed Janet Yellen’s footsteps by hiking short-term interest rates by a quarter of a percent twice so far this year, putting the federal funds rate at 1.75/2 percent. According to predictions by Fed officials, there will likely be two more increases by the end of the year.
Inflation: The rally in global oil prices pushed headline inflation to a six year high of 2.8 percent this spring. Without food and energy, even the Core CPI is edging up to 2.3 percent, a 15 month high in May. The Fed’s preferred measure of inflation, the personal consumption expenditures (PCE) price index, increased 2.3 percent year-over-year in May.
Economists expect that the recently enacted tariffs could add to the price pressure, but not so much so as to derail growth. (More on tariffs below) According to economist Joel Naroff, since last spring, “the cost of all goods and services was up sharply and that is what we need to watch, since that is what consumers actually buy.”
Housing: With the economy picking up steam and incomes creeping higher, you might think that the housing market would be on fire. Unfortunately, just as more Americans are financially ready to buy a home, it’s hard to find one. The National Association of Realtors said that the lack of inventory is pushing prices higher. Compounding the problem is the fact that 2018 has ushered in a new era for mortgage rates, which recently touched a seven-year high. The situation may help explain why the most recent ATTOM Data Solutions Housing Affordability Index dropped to its lowest level since Q3 2008.
Trade/Tariffs: The Trump Administration has enacted a number of tariffs this year: 10 percent on imported aluminum; 25 percent on imported steel; and 25 percent on $34 (soon to be a total of $50) billion worth of Chinese goods “that contain industrially significant technologies.” In retaliation, the European Union, Canada, Mexico and China have responded with a retaliatory round of tariffs on U.S. exports, including soybeans, whiskey and motorcycles. According to the analysts at Capital Economics, “protectionism alone is unlikely to kill the economic expansion,” but it could eat into growth this year and potentially make the next recession, worse.
Markets: Volatility is back, which while unnerving at some points, should not meaningfully impact long-term investors, who are funding goals that are years or decades away. Sure, the tariff situation has caused many investors to flee large cap stocks and rotate into smaller, domestic-focused ones (see performance of S&P 500 vs. Russell 2000 below). And indeed, emerging market stocks have been hurt by a stronger U.S. dollar and yes, as the economy has improved, bond prices are down and yields are up. But hopefully none of these short-term events will derail you, as you execute your financial and investment plan.
Through June 30th
- DJIA 24,271: up 0.7% on quarter, down 1.8% YTD
- S&P 500 2718: up 2.9% on quarter, up 1.7% YTD
- NASDAQ 7510: up 6.3% on quarter, up 8.8% YTD
- Russell 2000 1643: up 7.4% on quarter, up 7% YTD
- 10-Year Treasury yield: 2.86% (from 2.41% on Dec 29 2017)
- AAA Nat'l avg. for gallon of reg. gas: $2.85 (from $2.24 year ago)