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Economy Forecast to Rebound in Second Half of 2016
But Consumer Spending Is Crucial to Feds' Equation


Economic growth was lackluster in the second quarter, and that negatively affected the first half of 2016. But the second half of the year should be better, that is, if the momentum in consumer spending continues unabated.

Economic growth was sluggish in the second quarter and proved to be a drag on the first half of 2016. But the second half of the year should be different, as a rebound is anticipated, according to Fannie Mae's latest Economic and Housing Outlook.

As a result, Fannie Mae has kept its full-year growth forecast unchanged at 1.8 percent.

However, it also qualifies this with the following statement: "Continued momentum in consumer spending in the third quarter is crucial for driving growth, as business investment is struggling."

A stellar jobs report in July is telling Fannie Mae that a near-term hike in personal incomes and an increased pace of hiring could spur consumers to spend more. This should help businesses improve their bottom lines and help them lower their inventory levels.

"Second quarter growth was a disappointment, but consumer spending appears solid heading into Q3, and we expect inventory investment to balance out after a surprising drawdown in Q2," said Doug Duncan, Fannie Mae chief economist.

"Credit expansion, combined with improving labor market conditions and strengthening household balance sheets, should continue to support consumers, who will likely be the primary driver of growth again in the second half of the year."

At present, the housing market is a "mixed bag," Duncan said.

New and existing homes have sold well, but single-family starts are down -- a trend that doesn't bode well if the market is to expand. Housing availability continues to hamper the industry, making affordability an issue as well, especially at the lower end of the spectrum.

"Robust rental demand during the second quarter of the year has created the lowest rental vacancy rate in decades," Duncan added. "In addition, the homeownership rate dropped to below 63 percent in the second quarter."

But there are signs that Millennials are at least beginning to buy more homes because of job and wage growth, as well as favorable mortgage rates.

Retail Sales Decline 0.3 Percent in August
Retail sales climbed 0.1 percent in July, but dropped 0.3 percent in August, the Wells Fargo Economics Group reports.

Excluding car and auto parts sales, the retail sales index was down 0.1 percent, so weakness in auto sales was perhaps the major reason for the significant drop in overall retail sales.

Motor vehicle and auto part dealer sales were down 0.9 percent in August, even though this sector jumped 1.7 percent in July. Furniture sales were down 0.7 percent in August after a decline of 1.1 percent in July. Sales of electronics and appliances stores grew 0.1 percent. Gasoline station sales dropped 0.8 percent after plunging 2.6 percent in July. Miscellaneous store retailers' sales plummeted 2.4 percent after increasing 0.3 percent in July.

"The strongest sectors of the retail sales and food services index were those related to food and drink," Wells Fargo's economists said. "On the retail sales side, food and beverage store sales were up 0.3 percent, while grocery store sales (a sub-segment) were up 0.4 percent. On the service side of the report, food services and drinking place sales were up a strong 0.9 percent after a flat month in July. "Thus, do not count consumers out just yet," Wells Fargo said. "Although the goods side of consumer demand was weak, the service side is still strong. They were probably just enjoying the last months of the summer."

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July 21, 2019, 1:14 pm PDT

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