U.S. Economy Turning the Corner?

Greg Ip from the Wall Street Journal penned an article last week explaining that certain pieces of the economic puzzle are beginning to come together. After months of sluggish growth, May retail sales (ex. autos and gasoline) rose 0.7% from April. Consumer spending has been a missing piece of the economic recovery, particularly given the strong gains in employment and lower gas prices. As it relates to employment, many economists have been questioning why wages have remained low despite a declining unemployment rate. This piece of the puzzle also slid into place last month, with average hourly earnings up 2.3% year-over-year in May, the highest annual gain since 2013. Better data prints have increased the expectation for GDP growth in the second quarter. The Atlanta Fed’s GDP Now forecast calls for second quarter GDP growth of 1.9%, up sharply from the less than 1% estimate just a few weeks ago. We acknowledge that domestic economic data has gained steam recently, but, as we discussed in our Investment Committee last week, there is still one piece missing from the puzzle: inflation. The Federal Reserve wants to see inflation bottom before raising rates, and based on last month’s Core PCE print of 1.2%, which was a deceleration from prior months, this hasn’t happened yet. So, as we’ve said throughout much of the year, watch inflation, as it is the one piece of the puzzle that will have the biggest impact on where interest rates go over the long term. It will also be a likely topic at the Federal Reserve’s post FOMC meeting press conference on Wednesday, where Fed Chair Yellen will explain the most recent monetary policy decision.   

Source: WSJ