August 2018 National Economic Outlook

Excellent Second Quarter Growth as Labor Market Continues to Strengthen

Executive Summary

The U.S. economy grew 4.2 percent at an annual rate in the second quarter of 2018, the best quarter in almost four years. On a year-over-year basis real GDP growth was 2.9 percent in the second quarter, the best pace since the first half of 2015.

  • After a lackluster first quarter consumer spending grew 4.2 percent in the second quarter, adding 2.6 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 1.2 percentage points to growth, as exports grew more than 9 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 157,000 jobs in July; the private sector added 170,000 jobs over the month, with government employment down by 13,000. There was a large upward revision to job growth in the prior two months of a combined 59,000.

  • The U.S. economy has added an average of 215,000 jobs per month so far in 2018, well above last year’s pace of 182,000.
  • After rising 0.2 percentage point in June the unemployment rate fell 0.1 percentage point in July to 3.9 percent; except for May, this is the lowest the unemployment rate has been since the end of 2000.
  • The broader U-6 unemployment rate (unemployed, underemployed and too discouraged to look for a job) fell 0.3 percentage point in July to a new cyclical low of 7.5 percent; it has not been this low since the spring of 2001.

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.

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August National Economic Outlook

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