In each Economic Update, the Research staff analyzes recently released economic indicators and addresses what these indicators mean for REALTORS® and their clients. Today’s update discusses retail sales and GDP growth.
- U.S. economic growth looks to be tepid heading into the November election. Today’s data on retail sales is implying a very slow GDP growth rate in the second quarter, probably between 1 to 1.5 percent. Moreover, a slightly higher level of business inventory implies less robust production activity and continuing slow GDP growth in the third quarter to the tune of 2 percent. Such growth rates will not meaningfully lower the unemployment rate. The economy after a recession needs to move at 4 percent or better on a consistent basis.
- Overall retail sales fell in June by 0.5 percent, though sales are higher by 3.8 percent from one year ago. Spending at furniture and home furnishing stores is holding on better than other sectors, with sales up 7.8 percent from one year ago, no doubt due to increases in home sales.
- The concern going forward is that inventories at retail shops have been rising. That likely means there will be fewer orders to restock in the upcoming months, which will slow production activity and job creation in the third quarter.
- In other economic data, the banking sector continues to rake in good profits, as evidenced by quarterly earnings reported by Wells Fargo and JP Morgan Chase so far. Citi, meanwhile, reported a $3 billion profit during the latest quarter, a good bottom line though down from one year ago The Fed’s low interest rate policy is greatly helping the banks’ bottom line. Banks have plenty of cash reserves to increase lending, but unfortunately they remain excessively stringent. The uncertainty related to the new Dodd-Frank financial regulation and various lawsuits thrown at the sector is one of the reasons why banks are holding on to excess cash and why stock prices have not zoomed up very high in proportion to profit growth.
- Let’s hope that banks recognize exceptional loan performance and profit opportunities in recently originated mortgages and begin to expand lending to more homebuyers. Not back to the lax bubble year standards, but just back to normal like the conditions in the 1990s. A beginning of a home price recovery should also be another motivator for banks to be less stringent. For real estate practitioners, if we get back to normal underwriting standards then home sales would rise by an additional 15 to 20 percent, on top of recent gains already observed.