The U.S. economy continued to improve its outlook in July, with GDP expanding +4.1% in Q2, the fastest pace in nearly four years. Taken in nominal terms, GDP rose +7.4%!
While real GDP growth of +4.1% growth did miss market expectations for +4.4% growth, it was an improvement on the first quarter’s +2.2% pace.
One potential blemish from the report was a sharp uptick in exports, with a surge in soybean exports due to recently imposed tariffs.
Consumer spending was robust, and business spending remained elevated. A change in private inventories was actually a negative contributor, which could in turn be a positive in Q3 as businesses restock.
Consumer Sentiment Remains Robust
Consumer sentiment remains robust, with the Conference Board index of consumer confidence rising to 127.4, from a revised 127.1 in July. The most recent jobs numbers released in July showed unemployment rising to 4% as more people entered the labor force. Average hourly earnings rose +2.7% Y/Y, which was a continuation of a trend towards higher wages. Personal Consumption Expenditures rose +0.4% M/M in June, with personal income also rising at a +0.4% M/M rate. All in all, the personal savings rate was unchanged at 6.8% in June.
The Fed’s preferred measure of inflation, the Personal Consumption Expenditures (PCE) Index, rose +0.1% M/M in June, and +2.2% Y/Y. Excluding food and energy the PCE Index rose +0.1% M/M and +1.9% Y/Y, remaining on trend for 2% inflation.
The S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index rose +6.4% Y/Y in May, flat versus the previous month. While housing data has come in weaker than expected in recent months, housing prices on the west coast continue to soar. Seattle, Las Vegas, and San Francisco remain red hot, with prices rising +13.6%, +12.6%, and +10.9% Y/Y, respectively, according to S&P. A dearth of new inventory across the country, coupled with rising remand, continues to create a squeeze that results in higher prices in most cases.
Taken together, short term interest rates are likely to continue moving higher as the Federal Reserve remains on track to raise rates two more times in 2018. According to data compiled by Bloomberg, the probability of a September rate hike is all but certain at 92.1%, while December still looks highly likely at 55.7%.
This article was written by the team at Nottingham Advisors, a participant in the ETF Strategist Channel.