International stocks offer significant value … If you’re patient enough to wait


This year has been an admittedly painful one for both U.S. and international stocks.  Through 9/30/22, and per MSCI Investable Market Index (IMI) data obtained through Bloomberg by Northern Trust Asset Management, U.S. equities are down 24.7%, emerging international equities are down 26.5% and developed international equities (ex-U.S.) are down 26.6%.

While all parts of the equity market appear to be down in tandem and by approximately the same amount, a closer look at the relative valuation in each IMI as well as the historic reversals between U.S. and international equity market outperformance may provide insight on the potential rewards available to those who are patient enough to wait, particularly in developed international markets.

In the U.S., the MSCI IMI represents 2,588 constituents, covering approximately 99% of the free float-adjusted market cap of small, mid-size, and large U.S. companies — broad, but representing only one country. MSCIs Emerging International IMI consists of approximately 3,210 companies in 24 countries including China, India, Taiwan, South Korea, Brazil, South Africa, Mexico, Indonesia, Thailand, and Malaysia, among others. Finally, the MSCI Developed International IMI includes 22 developed countries including Japan, U.K., Canada, Switzerland, France, Australia, Germany, Netherlands, Sweden, and Denmark.

Although collectively the stocks in each of these IMIs have fallen by approximately the same amount through September of this year, valuations in each area are much different when considered in relation to the earnings expected from the underlying companies in each over the coming twelve-month period. For example, in the U.S. and despite the 24.7% drawdown in stock prices through the end of September, U.S. equities are still no grand bargain and can best be described as fairly-valued — that is to say that current U.S. stock prices (cumulatively) were 15.6 times the earnings expected from the companies in that IMI over the next twelve month period, which was nearly the same as the long-term median (i.e. middlemost) forward price-to-earnings (P/E) multiple of 15.7 times, based on data going back to 1970.

Relative valuation is a bit more interesting in the emerging international markets and as measured by forward P/E. In this IMI, stocks were priced at 10.2 times next year’s earnings at 9/30/22, versus a long-term median forward P/E of 11.3. A forward P/E of 10.2 falls somewhere between the median and the low of where forward P/Es have historically fallen two-thirds of the time since 1995, based on calculations at the end of each month throughout the period. In this context and if history is any guide, emerging market stocks can be thought of as being somewhere between fairly valued and undervalued.

In Developed International Markets (ex-U.S.), relative valuation is even more intriguing. Here, the forward P/E of the companies contained in this IMI amounted to 11.0 at 9/30/22, versus a long-term median forward P/E of 13.9.  At this level, the collective relative value of developed international stocks was not only below its long-term historic median, but also well below the range of forward P/Es that have been captured in this area two-thirds of the time since 1970, suggesting that developed international stocks are clearly undervalued, if history is any guide.

To a large degree, valuations reflect the current situation in each IMI and the investment opportunities investors perceive there on a more immediate basis.  Stocks become cheap when no one wants to own them and when the current situation and/or outlook is poor. That said, situations can and do change, and when they do, investors stand to reap most of the rewards by being invested there early. This perfectly describes the prospect of being invested in international markets today — specifically the developed international markets.

Based on relative valuation alone, we could argue that international stocks are a better buy than U.S. stocks. We could also argue that international stocks may be poised to outperform U.S. stocks in the not-too-distant future, based on data collected from FactSet and MSCI, and as presented by J.P. Morgan Asset Management in their Q322 Guide to the Markets. In this publication, J.P. Morgan looks at periods of U.S. equity market outperformance versus periods of international equity market outperformance, as measured by the MSCI US and MSCI EAFE (Europe/AustralAsia/Far East) indices, going back to the early 1970s.  It tracks the number of years the relative outperformance lasted and the cumulative outperformance (in percentage terms) that resulted during each period.

At 9/30/22, the data in J.P. Morgan’s Q322 Guide to the Markets shows that U.S. stocks have been outperforming international stocks for the last 15 years, resulting in cumulative outperformance of 210% during that period. The data also suggests that this is the longest streak of U.S. versus international outperformance that has taken place over the last 50 years — the next longest period was only 7.3 years and favored international stocks. Market leadership between domestic and international stocks (i.e. sustained outperformance of one over the other for at least a 12-month period) has changed hands at least nine or ten times since 1970, so not only are international stocks cheaper than U.S. stocks on a relative basis, but they seem to be due for a period of outperformance.

No one knows when international stocks will begin to outperform U.S. stocks, but few would argue that they shouldn’t be included in a well-diversified investment portfolio, regardless of when that day might come. Waiting until current conditions improve to add them (or add more of them) to your portfolio risks missing out on a substantial portion of the rewards you’re likely to reap. History suggests that if you miss out on just a few of the best performing trading days of the year, you typically miss out on most of the year’s returns.

Buying parts of the market when they’re out of favor (i.e. cheap on a relative basis) and assuming that reversals of U.S. versus international equity market outperformance will continue seem like rational propositions, particularly as they relate to the diversification of your portfolio and its risk-adjusted return.  Investing in international markets may require patience, but it can lead to outsized rewards for those able and/or willing enough to wait.

Rossi is senior vice president and senior equity strategist at Canandaigua National Bank & Trust Co.

Forecast for second-half growth throttled back after hurricanes

Last month’s hopes for a strengthening economy have been struck a serious blow by a nasty gang, namely storms Harvey, Irma, Jose and Maria. The short-term effect for the economy has been dismal. However, like New Orleans and Katrina, the longer term outlook for the devastated areas is promising. Lessons learned with Katrina have set the stage for a quicker recovery than that in New Orleans.

However, the present situation indicates the economy will show slower recovery in this second half of 2017. While the first quarter of 2017’s anemic growth of 1.2 percent was countered nicely by second quarter growth of 3.1 percent, early hopes of a 3 percent or more third quarter have shrunk to a 2 percent or so estimate, with hopes for a full year GDP of around 2.2 percent, down from earlier hopes of 2.6 percent or higher.

Consumer spending has not advanced at a pace sufficient to reach that 2.6 percent GDP growth rate. Retail sales data for August were terrible, with total retail sales falling 0.2 percent from July levels. While August was partially blamed on Harvey, June and July retail sales figures were revised downward, dampening my belief that consumers were about to continue the spending gains of the early second quarter.

Part of the blame can go to gasoline costs, where price increases boosted spending by 2.5 percent in August. There’s a connection between gasoline costs and other spending. With gasoline spending up 6.4 percent thus far in 2017, spending in health and personal care rose only 0.5 percent, clothing was up just 0.6 percent, department store spending fell 0.8 percent and electronics and appliances dropped 3.5 percent. Stalwarts autos (1.5 percent-plus for the year) and internet sales (8.4 percent-plus, down from double-digit growth) also disappointed.

Housing data show the same consumer caution. Existing home sales in August were at a 5.35 million pace, down 1.7 percent from July and up only 0.2 percent from sales levels of August 2016. While inventories remain a big part of the problem, Harvey takes some of the blame, accounting for a 5.7 percent drop in sales in the South. The only bright spot here is that prices are holding, with the U.S. median price of $253,500 up 5.6 percent over year ago levels. So the 2.1 percent inventory shrinkage year-over-year has firmed prices for existing homes.

New home data were a bit of an enigma. They have been somewhat weak all year, and Harvey affected the August pace of 560,000 sales, down 3.4 percent from July with weaknesses not only in the South, but also the Northeast and West. Unlike existing home prices, new home prices continued to sag. The median price of a new home was $300,200 in August, up a tiny 0.4 percent over August 2016 levels, yet inventories had grown almost 18 percent since August 2016. It’s hard to suggest the price differential between new and used is important, as the median sales price differential between the two has shrunk from 32 percent a couple of years ago to 18 percent today.

Inflation data got a Harvey spike in August as gasoline and other energy costs created a big wholesale bump in the Producer Price Index. The PPI for final demand rose a healthy 0.2 percent in August after a -0.1 percent and 0.1-plus percent performance in July and June. Energy costs rose 3.3 percent for the month, and final demand wholesale inflation would have been worse except for the fact that wholesale food costs fell 1.3 percent. Even so, the PPI for final demand rose 2.4 percent over the past twelve months, which certainly drew some attention from the Federal Open Market Committee (FOMC).

Gregory MacKay is economic consultant to Canandaigua National Bank.

(c) 2017 Rochester Business Journal. To obtain permission to reprint this article, call 585-363-7269 or email [email protected].

Shrinking industrial output limits Rochester’s growth

New data from the U.S. Bureau of Economic Analysis provide another reminder of the difficult recovery that local residents and businesses have faced since the Great Recession.

Adjusted for inflation, the total value of goods and services produced in the Rochester metropolitan area declined by 0.2 percent in 2016—the third time in the past six years that real GDP has contracted on an annual basis (Figure 1).

Real goods and services output remains 4.1 percent below the 2006 pre-recession peak, contrasting starkly with the 14 percent average gain recorded by the 100 most populous U.S. metro areas.

The major drag on Rochester’s economy in 2016 was a familiar one—shrinking industrial output.

Measured in constant 2016 dollars, real manufacturing GDP fell by $231 million or 3 percent. On a per capita basis, this translates to a 2.8 percent decline—nearly six times the -0.5 percent average loss for the top 100 metro areas (Figure 2).

Since 2006, Rochester’s real manufacturing output has fallen by a breathtaking 44.9 percent, shaving $6.4 billion from topline goods and services GDP.

While data on specific industry subsectors is not available, downsizing at Eastman Kodak Co. likely accounts for the bulk of the reduction.

Still, while industrial headwinds are diminishing, they have not completely abated. Lower factory output appears to have dragged on the broader Rochester economy last year.

Real per capita GDP from non-manufacturing industries expanded by just 0.6 percent—roughly half the 1.2 percent average gain for the top 100 metros and only one-third the 1.8 percent increase in neighboring Buffalo.

If Rochester’s economy is to accelerate in 2017 and 2018, gains in global manufacturing demand will be an important variable to watch.

Gary Keith is vice president and regional economist at M&T Bank Corp.

(c) 2017 Rochester Business Journal. To obtain permission to reprint this article, call 585-363-7269 or email [email protected].

Home sales in U.S. decline in August—blame Harvey

U.S. home sales fell 1.7 percent in August, pulled down by the effects of Hurricane Harvey and a worsening shortage of available properties.

The National Association of Realtors said Wednesday that sales of existing homes sank last month to a seasonally adjusted annual rate of 5.35 million. Would-be homebuyers are being limited by a decline in the number of sales listings. The shortage has become a drag on sales and has caused prices to climb sharply.

Over the past 12 months, sales have risen only 0.2 percent. Houston-area home sales have plunged 25 percent over the past year largely because of the damage from Harvey — a decrease that could linger through 2018, the Realtors said.

The median sales price has increased 5.6 percent from a year ago to $253,500.

Sales listings have tumbled 6.5 percent over the past 12 months to 1.88 million. The supply of homes for sale should continue to decline through February because the winter and fall are generally slower for home sales.

Homes are selling much more quickly because of the lack of options for buyers. The average number of days on the market was 30 in August, down from 36 a year ago.

August sales surged in the Northeast and increased modestly in the Midwest. But sales dropped sharply in the South and West.

Borrowing costs for would-be homebuyers have lessened in recent weeks, helping to preserve a degree of affordability despite the price increases.

Mortgage buyer Freddie Mac said the average 30-year fixed mortgage rate last week was 3.78 percent. This marked a steep decline from this year’s peak of 4.3 percent, which was reached in March.

Rates have slipped in recent months amid signs that inflation has weakened and President Donald Trump’s plans for stimulating faster economic growth have hit roadblocks.

Josh Boak is an Associated Press economics writer.

(c) 2017 Rochester Business Journal. To obtain permission to reprint this article, call 585-363-7269 or email [email protected].

U.S. services sector expanded at stronger rate in August

U.S. services businesses grew at a faster pace in August as measures for new orders and hiring improved, though some of those gains could disappear temporarily in the wake of damage from Harvey.

The Institute for Supply Management said Wednesday that its services index rose in August to 55.3 from 53.9 in July. The July reading had been the lowest since the index registered 51.7 in August 2016. Still, anything above 50 signals growth. The services sector has expanded for 92 straight months.

The gains in hiring, new orders and production point to continued economic growth. Anthony Nieves, chair of ISM’s non-manufacturing survey committee, says the current reading corresponds with annual economic growth of about 2.5 percent.

But those gains could drop off due to short-term setbacks caused by Harvey and, possibly, Irma, said Ian Shepherdson, chief economist at Pantheon Macroeconomics.

After Hurricane Katrina struck in 2005, the services index and its hiring component both fell.

“We tentatively expect bigger declines this time around, but the key point for now is that ahead of the storms, the non-manufacturing sector was in good shape,” Shepherdson said.

The Commerce Department said last week that gross domestic product, the broadest measure of economic health, expanded at an annual rate of 3 percent in the April-June quarter. This was the best performance since early 2015 as growth for the April-June quarter was revised upward from an initial reading of 2.6 percent.

Still, the stronger growth follows a sluggish start to 2017. The growth rate in the January-March quarter was a lackluster 1.2 percent.

The ISM survey showed that 15 services industries reported gains in August, including retails, real estate and accommodation and food services. Just two sectors contracted: agriculture and transportation.

Private service-sector workers account for more than 70 percent of American jobs.

Josh Boak is an Associated Press economics writer.

(c) 2017 Rochester Business Journal. To obtain permission to reprint this article, call 585-363-7269 or email [email protected].

Analysts puzzle over poky growth of economy since 2009

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.

(c) 2017 Rochester Business Journal. To obtain permission to reprint this article, call 585-363-7269 or email [email protected].

Knowledge-based industries’ hiring outpaces all others

The July jobs report was another sobering reminder of the challenges facing the Rochester economy.

Relative to year-ago levels, private sector employment declined by 1,400 or 0.3 percent—reversing the 1,300 gain recorded in June.  On a year-over-year basis, the region’s private sector job count has fallen in six of the seven months of 2017.

While caution should always be used in tracking “real time” employment ups and downs, the 2017 directional pattern is disappointing.

Greater insight into the current labor market outlook can be obtained by categorizing employment into two specific clusters.

The first, broadly arranged under the so-called “Tech-Knowledge” umbrella, consists of the health care, education, professional, scientific and technical services, information and high-tech manufacturing industries—rapidly evolving sectors that rely on a significant percentage of employees with specialized skills and training.

The second group is the aggregate of all other private sector industries.

This rough sectorial sorting reveals a deeply bifurcated labor market—one with solid hiring gains in knowledge-based industries offset by relative stagnation in all other sectors.

For example, adjusted for seasonal variation, employment in Rochester area “Tech-Knowledge” industries has increased by 8,200 or 6.1 percent since the start of 2015—a pace approximating the 6.5 percent national average gain over this period (Figure 1).

Conversely, employment in sectors outside the “Tech-Knowledge” grouping has been relatively flat and actually declined by 1,200 jobs in July—in sharp contrast to the 4.1 percent national average gain (Figure 2).

The key take away from this calculus is that local labor market growth is increasingly driven by hiring at “Tech-Knowledge” organizations.  These sectors—which represent about one of every three Rochester area jobs—present significant opportunity for future expansion and hiring activity.

However, the challenge of stimulating hiring growth in other sectors remains daunting for economic policymakers.

Gary Keith is vice president and regional economist at M&T Bank Corp.

(c) 2017 Rochester Business Journal. To obtain permission to reprint this article, call 585-363-7269 or email [email protected].

U.S. retail sales jumped 0.6 percent in July

Consumers went out shopping in a big way in July, pushing up retail sales by the largest amount in seven months.

Retail sales advanced 0.6 percent last month, the best showing since a gain of 0.9 percent last December, the Commerce Department reported Tuesday. For most of this year, retail sales have been lackluster, including a decline in May of 0.2 percent and a modest 0.3 percent June gain.

Consumer spending accounts for around 70 percent of economic activity, so the latest result is a good sign for overall economic growth.

Michael Pearce, U.S. economist at Capital Economics, said the strong gain in July sales showed that consumer spending was off to a good start for the third quarter.

“With the labor market still adding jobs at a rapid pace, consumption growth looks set to remain strong for at least the rest of this year,” Pearce said.

Sales got a boost in July from a 1.2 percent jump in auto sales, the strongest result since December. There were sales gains in other areas as well, including furniture stores, hardware stores and restaurants.

The overall economy, as measured by the gross domestic product, grew at a 2.6 percent annual rate in the April-June quarter, a significant rebound from growth of just 1.2 percent in the first quarter. Economists are looking for growth to remain strong in the current July-September period, although some forecast a slight slowdown from the second quarter pace.

The ongoing strong gains in employment will add further fuel to consumer spending. The unemployment rate in July dropped to a 16-year low of 4.3 percent.

For July, sales of furniture, hardware and building supplies and sporting goods were all up. Sales at general merchandise stores posted a tiny 0.1 percent gain. Sales by nonstore retailers, the category that tracks internet commerce, posted a strong gain of 1.3 percent. Online shopping has been making major inroads over traditional brick-and-mortar stores.

Pearce said that the surge in online sales reflected in part Amazon’s Prime Day promotion event which boosted U.S. orders for the giant internet shopping company by 50 percent compared to the same event last year.

Martin Crutsinger is an Associated Press economics writer.

(c) 2017 Rochester Business Journal. To obtain permission to reprint this article, call 585-363-7269 or email [email protected].

Jobless rate raises question: How much better can it get?

A drop in the unemployment rate to a 16-year low raises a tantalizing question about the job market: How much better can it get?

Earlier this year, economists worried the low unemployment rate meant businesses would struggle to find workers and that would drag down the pace of hiring. Those fears were heightened by a tiny job gain in March and modest hiring in May.

Yet Friday’s jobs report suggests such concerns are premature. Employers added 209,000 jobs, after a solid gain of 231,000 in June, the Labor Department said. The unemployment rate ticked down to 4.3 percent, from 4.4 percent, matching the low reached in May.

The U.S. economy is benefiting from steady growth around the world, with Europe and Japan perking up and China’s economy stabilizing. Corporate revenue and profits are growing too, and the stock market has hit record highs.

Economists were particularly encouraged by more Americans coming off the sidelines and finding jobs. For the first few years after the recession, many of the unemployed stopped looking for work.

Some were discouraged by the lack of available jobs. Others returned to school or stayed home to take care of family. The government does not count those out of work as unemployed unless they are actively searching for jobs.

That trend began to reverse last year and has continued into 2017. To many economists, that means robust hiring could continue for many more months, or even years.

“There’s more people willing to work than the unemployment rate would have you believe,” said Nick Bunker, a senior policy analyst at the Washington Center for Equitable Growth, a liberal think tank.

President Donald Trump celebrated the data in a tweet shortly after the numbers were released. “Excellent Jobs Numbers,” he wrote, “and I have only just begun.”

The pace of hiring this year, while solid, is pretty much the same as it was last year under President Barack Obama. Employers have added an average of 184,000 jobs a month through July, compared with 187,000 in 2016. Monthly job gains topped 200,000 on average in 2014 and 2015.

The steady hiring is adding up. In July, the proportion of Americans aged 25 through 54 who had a job or were looking for one rose to 81.8 percent, up a half-percentage point from a year earlier and the highest since December 2010.

Economists focus on that age group because it filters out the impact of retirements by the huge baby boomer generation and excludes younger workers who are more likely to be in school.

That means more Americans are optimistic about the job market and launching job searches. But that proportion is still substantially lower than the all-time peak of 84.6 percent, reached in January 1999.

The unemployment rate fell to a three-decade low of 3.9 percent the following year, in April 2000. That represented the best of all worlds: A low unemployment rate with a lot of people working or looking for work.

Economists doubt the jobless rate can fall that low again without touching off inflation, as employers are forced to offer higher pay to attract workers from a dwindling supply of unemployed. That is why the Federal Reserve has raised short-term interest rates three times in the past seven months, which they hope will forestall future price increases.

But many economists worried the ultra-low unemployment rate in 2000 would touch off inflation, and it did not. The economy at that time benefited from much higher rates of productivity growth, which allowed employers to raise pay and hire more without having to lift prices.

There’s also no way to know whether the proportion of people working or looking for work could return to its 1999 peak. Many economists are doubtful, in part because it rose sharply in the 1980s and 1990s as women flooded the workforce. The proportion of women working or looking for work has slipped since 2000.

Based on historical trends, the share of working-age Americans who either have jobs or are looking for one could rise another 0.7 percentage points. That would create 1.8 million more jobs, according to Andrew Sojourner, an economist at the University of Minnesota.

Christopher Rugaber is an Associated Press economics writer.

(c) 2017 Rochester Business Journal. To obtain permission to reprint this article, call 585-363-7269 or email [email protected].

Economy expanded at stronger 2.6 percent rate in second quarter

The U.S. economy revved up this spring after a weak start to the year, fueled by a surge in consumer spending. But the growth spurt still fell short of the optimistic goals President Donald Trump hopes to achieve through tax cuts and regulatory relief.

The Commerce Department said Friday growth in the gross domestic product, the economy’s total output of goods and services, expanded at a 2.6 percent annual rate in the April-June quarter. That is more than double the revised 1.2 percent pace in the first quarter.

The improvement was powered in large part by robust consumer appetite for items such as clothing and furniture.

The 2.6 percent GDP gain came in close to economists’ expectations.

“Consumers continue to drive the economy’s growth, but firmer business investment is also a plus,” said Mark Zandi, chief economist at Moody’s Analytics. “Weaker housing construction was the only significant drag on growth in the quarter.”

Trump campaigned on a pledge to boost growth to rates of 4 percent or better. So far, his economic program has not advanced in Congress. But on Friday he still hailed the latest acceleration in growth.

“GDP is up double from what it was in the first quarter — 2.6 percent,” Trump told a crowd in New York. “We’re doing well. We’re doing really well. And we took off all those restrictions.”

Trump told the crowd he was proud he had appointed wealthy people to his Cabinet, including Commerce Secretary Wilbur Ross and Treasury Secretary Steven Mnuchin.

“I want a rich guy at the head of Treasury. I want a rich guy at the head of Commerce,” Trump told the audience on Long Island. “We’ve been screwed so badly on trade deals. I want people that made a lot of money now to make a lot of money for our country.”

Trump in May put forward a budget for next year that projects growth to steadily advance in the coming years, hitting a sustained pace of 3 percent annually by 2021. The Congressional Budget Office and most private economists are less optimistic, believing growth rates have the potential of improving only slightly from the lackluster rates seen in the current recovery, the weakest in the post-World War II period.

Also Friday, the department’s Bureau of Economic Analysis issued an annual benchmark revision of its data going back three years. The revision slightly boosted growth over the past three years, enough to lift the average growth in this recovery, now the third-longest in U.S. history, to annual gains of 2.2 percent, up from the previous estimate of 2.1 percent.

The 2.6 percent growth in the second quarter was the fastest pace since the economy expanded at a 2.8 percent rate in the third quarter of last year.

Much of the strength in the April-June period came from consumer spending, which grew at a 2.8 percent rate, up from a 1.9 percent growth rate in the first quarter. Consumer spending accounts for 70 percent of economic activity. The economy also benefited far more modest inventory reductions, which was a big drag on first quarter growth.

In the other major categories, business investment in plant and equipment grew at a 5.2 percent rate. But housing construction tumbled at a 6.8 percent rate, a payback after an 11.1 percent surge in the winter due to warmer-than-normal weather. Economists believe housing will resume growing in coming quarters.

A shrinking trade deficit added a modest 0.2 percentage point to growth as exports rose while imports, which subtract from the GDP, grew at a slower pace.

The government sector grew at a 0.7 percent rate, driven entirely by a big jump in defense spending. Domestic federal programs and state and local governments all showed small declines.

Weakness in the first quarter that is followed by a stronger spring expansion has become a familiar pattern in recent years, prompting the government to launch a concerted effort to deal with flaws in the government’s seasonal adjustment process.

Even with the spring rebound, analysts believe the economy will be unable to meet the ambitious targets set by Trump. For this year, many analysts believe growth will come in around 2.2 percent, essentially where growth has been since the recovery began in mid-2009.

Darlene Superville contributed to this report.

Martin Crutsinger is an Associated Press economics writer.

(c) 2017 Rochester Business Journal. To obtain permission to reprint this article, call 585-363-7269 or email [email protected].

Rochester region gets good news as employment report shows growth

The June employment report provided welcome news for the Rochester area.

After experiencing a worrisome 2,700 (0.6 percent) decline in private employment over the first five months of 2017, the local job count expanded by 1,700, or 0.4 percent, last month.

While significantly trailing the 1.7 percent U.S. gain—as well as the 1.1 percent increase for Upstate New York overall—this was the strongest local hiring performance since September 2016.

Nevertheless, two key industries remain potential hot spots—continuing to record sizable headcount reductions from 2016 levels—administrative business services and retail trade.

Administrative services (“back office”) employment was 2,200 (7.4 percent) below year-ago levels in June, while retail trade employment was down by 1,400 or 2.5 percent.

The decline in administrative services payrolls reflects the late-2016 closure announcements by several large call center and customer support firms.  These company-specific events, while painful, are unlikely to be harbingers of future industrywide restructuring.

On the other hand, retail sector turbulence has been a nationwide story in 2017. Pressure to compete with lower-cost online merchants has been building for many years and is fundamentally altering the traditional brick and mortar retail landscape.

Rochester’s retail trade job cuts have significantly topped the national norm in 2017—with the 2.5 percent contraction in June providing a sharp contrast to the flat U.S. reading (Figure 1).

Retail sector downsizing pressures are unlikely to ease any time soon, presenting a continuing drag on labor market momentum.

Moreover, adjusted for population size, the Rochester area has potentially sizable exposure to future retail employment cuts.  Locally, the number of retail workers per 10,000 residents is 5 percent higher than average for large U.S. metropolitan areas (Figure 2).

With the outlook for consumer spending remaining sluggish, retail trade employment will bear close scrutiny over the remainder of 2017.

Gary Keith is vice president and regional economist at M&T Bank Corp.

(c) 2017 Rochester Business Journal. To obtain permission to reprint this article, call 585-363-7269 or email [email protected].