Remember the “good old days” of dial-up internet connection? It seems like we waited forever for the connection, and then waited longer for pages to load. That reminds me of the current state of the economy, which remains solidly in a slow, modest growth mode.
Since the end of the recession (June 2009), consumers have yet to ring up a 3 percent plus spending growth year, while business investment turned negative in 2016 after falling for four straight years. Why? That’s the mystery. Job growth has been relatively strong since the recession, averaging about 2.5 million jobs a year, but wage growth has struggled to average 1 percent above the inflation rate. There is some suggestion that demographics (boomers retiring and being replaced by lesser earning younger workers) has played a part in the relatively weak consumer spending numbers, which have trended downward since 2015.
However, the latest couple of months of retail sales numbers have been strong, suggesting that consumers may be coming back to the marketplace. That would match the latest consumer confidence data that indicate consumers are more upbeat than at the peak of the pre-recession days.
The offset to this stronger retail surge has been housing activity. Both new and existing homes sales have stalled recently. New home sales were down 8.9 percent year-over-year in July, while the median sales price rose 6.4 percent. Existing home sales have risen a mere 2.1 percent year-over-year, while median prices have risen 6.2 percent. Combined, single family housing sales are mired around the 6 million units annualized level, with everything from demographics, stricter lending, land and material supply and general uninterest in homeownership being blamed. However, builder confidence is approaching 2005 levels, and building permits and starts continue to improve. There could be some lift in housing developing.
Business data remain mixed. Business spending fell 1.6 percent in 2016 as nonresidential spending on structures and equipment turned negative. Add in shrinking inventories since early 2016, and the lack of business impetus becomes apparent. There has been reasonable recovery in nonresidential spending in 2017 and mixed results in residential. Durable goods orders remain volatile, with June and July results offsetting each other, but a reasonable 5 percent growth rate year-to-date versus 2016. Any serious contribution from business spending for the remainder of this year rests on inventory buildups.
The minutes of the most recent Federal Open Market Committee meeting indicated a “no change” in stance on the economy. The committee belief remains that inflation will shake off recent “idiosyncratic factors” and will approach 2 percent in 12-18 months. They remain committed to the start of balance sheet shrinkage by year end 2017, and barring any unusually adverse data, one more rate hike this year. Economic growth is projected to continue at a “moderate” pace. The only notable news from the minutes was the report that the inflation discussion seems to be growing. While still a minority, some members mentioned the possibility of disinflation, and suggested that current inflation models weren’t working well. Another minority thought rates weren’t increasing fast enough. At meeting end, however, the vote was unanimous to carry on with a “gradual” approach, a compromise promoted by Chair Janet Yellen.
Gregory MacKay is economic consultant to Canandaigua National Bank.
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