July means cookouts, beach time and, for certain geeky financial folks like me, the perfect opportunity to recap where things stand for the economy, six months into the year.
Economic growth: The current expansion (the second longest in U.S. history) got off to a slow start in 2018, but it gained momentum in the second quarter. The tax cut has fueled corporate spending and consumers are perking up. Most economists anticipate that the economy, as measured by gross domestic product, will expand by about 3 percent in 2018, the best showing since 2005.
Labor market: The economy has added just over 200,000 jobs per month on average in 2018, impressive considering that we are entering the 10th year of the recovery. The unemployment rate has dropped to an 18-year low of 3.8 percent, the broader rate has fallen, job openings have surged, wages are edging higher, and the quality of jobs is improving.
Federal Reserve rate hikes: The Federal Reserve, under new chief Jerome Powell, has followed in Janet Yellen's footsteps by hiking short-term interest rates by a quarter of a percent twice so far this year. According to the predictions by Fed officials, there will likely be two more increases by the end of the year.
Inflation: The rally in global oil prices pushed headline inflation to a six-year high of 2.8 percent this spring. Without food and energy, even the Core CPI (that is, the consumer price index minus food and energy costs, which are considered very volatile) is edging up — to 2.3 percent, a 15-month high in May.
Economists expect that the recently enacted steel and aluminum tariffs will add to the price pressure, but not enough to derail growth. (More on tariffs below.) According to economist Joel Naroff, "Since April 2017, the cost of all goods and services was up sharply and that is what we need to watch, since that is what consumers actually buy."
Housing: With the economy picking up steam and incomes creeping higher, you might think that the housing market would be on fire. Unfortunately, just as more Americans are financially ready to buy a home, it's hard to find one. The National Association of Realtors said that the lack of inventory is pushing prices higher. Compounding the problem is the fact that 2018 has ushered in a new era for mortgage rates, which recently touched a seven-year high. The situation may help explain why the most recent ATTOM Data Solutions Housing Affordability Index dropped to its lowest level since Q3 2008.
Trade/tariffs: The Trump Administration has enacted a number of tariffs this year: 10 percent on imported aluminum; 25 percent on imported steel; and 25 percent on $50 billion worth of Chinese goods "that contain industrially significant technologies." In retaliation, the European Union, Canada, Mexico and China have responded with a round of tariffs on U.S. exports, including soybeans, whiskey and motorcycles.
According to the analysts at Capital Economics, "protectionism alone is unlikely to kill the economic expansion," but it could eat into growth this year and potentially make the next recession worse.
Markets: Volatility is back, which while unnerving at some points, should not meaningfully affect long-term investors, who are funding goals that are years or decades away. Sure, the tariff situation has caused many investors to flee large-cap stocks and rotate into smaller, domestic-focused ones. And indeed, emerging-market stocks have been hurt by a stronger U.S. dollar and, yes, as the economy has improved, bond prices are down and yields are up.
But hopefully none of these short-term events will derail you, as you execute your financial and investment plan.