Economic Outlook - August 2018
- The Conference Board Leading Economic Index (LEI) for the U.S. increased 0.5% in June to 109.8 (2016 = 100), following no change in May, and a 0.4% increase in April. This increased reading suggests continuing solid growth for the U.S. economy for at least the next six months. Growth among the leading indicators was widespread, with the exception of housing permits, which declined once again.
- Second quarter economic growth advanced at a 4.1% annual rate powered by higher consumer spending and business investment. We expect the current quarter for U.S. economic activity to expand in excess of 4.0%. Gross Domestic Product (GDP) could well continue to advance at this stronger pace for the balance of the year.
- “Potential” GDP growth has also accelerated. Economists use the term potential growth to indicate how fast the economy could grow if the unemployment rate remains steady. Unemployment rate declines of recent years shows that potential real GDP growth has picked up. Potential GDP grew at 0.6% annually for six years prior to mid-2017. In the last year, potential GDP has risen to 2.0% and trends suggest it’s moving higher.
- The Institute for Supply Management (ISM) Manufacturing Report On Business® is considered a reliable economic indicator, as is the manufacturing sector in general. According to this report, economic activity in the manufacturing sector and the overall US economy expanded in July for the 111th consecutive month. The closely watched Purchasing Managers Index registered 58.1% in July, a decrease of 2.1% from the June reading of 60.2%. A reading of 50.0% is considered neutral. Comments from the survey panel participants reflect continued expanding business strength. Demand remains strong, with the New Orders Index at 60% or above for the 15th straight month while the Customers’ Inventories Index remains low.
- The unemployment rate continues to hover around 4%. According to the most recent report from the Bureau of Labor Statistics, job openings remain above 6.6 million with roughly the same number of job seekers, indicating continued strength in the labor market.
- Household formation in the second quarter surged to 1.67 million, well above the four-quarter average of 1.26 million. Increases in household formation are the principal driver of housing related consumer spending and provide a substantial lift to U.S. economic growth.
- Hovering around an 18 year high, the consumer confidence index rose to 127.4 in July from a revised 127.1 in the prior month. The index reflects consumer perceptions of business conditions and employment confidence for the months ahead. The monthly report details consumer attitudes and buying intentions.
- Corporate earnings of the S&P 500 are on track to grow at 22% this year (about half of this year’s growth is related to tax reform) and are expected to grow by 10% next year.
Sources: Bloomberg LLC, FactSet, U.S. Department of Labor
Disclosure: This commentary reflects the opinions of Welch & Forbes based on information that we believe to be reliable. It is intended for informational purposes only, and not to suggest any specific performance or results, nor should it be considered investment, financial, tax or other professional advice. It is not an offer or solicitation.
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