Money Mondays: How’s The Economy?

So, how’s the economy doing these days? 

Our latest peek at the state of the U.S. economy came out on Friday, and Commerce Department numbers show the economy expanded at a rate of 2.6 percent in the second quarter of the year. That is a big improvement over the 1.2 percent rate of growth we saw in the first quarter of 2017, but there are some indicators that tell us we might want to hold off on celebrating too much.

Let’s start with the good news. What is positive about Friday’s report?

We talked about how American consumers are faring on a recent show. They are feeling good about the present, but are anxious about where the economy is heading. That plays out in the Commerce Department’s report. Consumers are spending more, and the improvement in economic growth during the second quarter can be attributed to that. Per the report, personal-consumption spending increased by 2.8 percent in Q2, up from 1.9 percent in the first quarter. That said, it is still lower than it was during the last three years, when consumer spending rose at an average annual rate of 3.2 percent.

In addition to consumer spending, business spending is also on the rise. U.S. business investment grew for the second straight quarter, at a rate of 5.2 percent. That is a very positive number because business investment is a proxy for private sector confidence in the underlying foundation of the economy.

Finally, trade numbers looked good. Exports of U.S. goods and services rose last quarter at a faster pace than imports of foreign products.

Now to the bad news, if there is any?

There are some pieces of the report that do raise eyebrows. First, the housing sector is showing signs of slowing down, with spending on home building and improvements falling by the most since 2010 last quarter. Residential fixed investment fell at a 6.8 percent annual pace, the biggest drop since the housing market was just pulling out of crisis mode. Compare that to the first quarter, when investment rose at a 11.1 percent, and we are could be seeing the first signs of a rough patch for the housing sector.

The other piece of not great news is that a tightening labor market doesn’t seem to be driving wage growth. The employment-cost index for civilian workers, which measures wages and benefits, showed an increase of just 0.5 percent in the second quarter, according to the Labor Department. Total compensation grew at a 2.4%, annual pace.

The reason this is troubling is because the unemployment rate is very low, clocking in at 4.4 percent. When the labor market is this tight, we generally expect wage growth to rise as employers compete for employees, but we have not seen that.

What does this report suggest about the economy’s future?

 It’s tough to say. In the past few years, we have seen a strong second quarter follow a disappointing first quarter, in terms of economic growth. This could be another example of the economy bouncing back in the spring after a slow winter. Overall, I think it is good news that the private sector is investing at a brisk pace, which means companies believe they can succeed despite the craziness that is coming out of washington.

The trade numbers mean that the strength of the dollar may be hurting American manufacturers to a lesser degree than before. But at the end of the day, the biggest concern is the continued slow wage growth. Without American workers earning more and spending it, economic growth will not be as strong as it can be.

Mellody Hobson is President of Ariel Investments, a Chicago-based money management firm that serves individual investors and retirement plans through its no-load mutual funds and separate accounts. Additionally, she is a regular financial contributor and analyst for CBS News.

 

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