Economy Watch: Should We Be Optimistic About the Economy?

Spending is up and existing homes sales are up—but will it continue?

By Dees Stribling, Contributing Editor

There’s a fair amount of evidence now that the U.S. economy’s going to see a second-quarter rebound. For one thing—and it’s pretty much the bedrock of everything else—the economy’s been creating jobs robustly for two months now (the employment numbers for the third month of the quarter, June, will be out on Thursday, ahead of the Independence Day holiday). Also, consumer spending is up; new and existing home sales are up; and now consumer sentiment is up a fair amount as well, according to the University of Michigan. Its Index of Consumer Sentiment came in at 96.1 for June, up from 90.7 a month ago, and 82.5 a year ago—increases of 6 percent and 16.5 percent, respectively.

“Consumers voiced in the first half of 2015 the largest and most sustained increase in economic optimism since 2004,” noted the survey’s chief economist, Richard Curtin. “Just as important, that same record was set by households in the top third of the income distribution as well as by the middle third and those in the bottom third of the income distribution. Moreover, the recent surveys recorded those same records when consumers were asked to evaluate prospects for the national economy, their personal finances and buying conditions.” So consumers are feeling a good vibe. That’s critical, because consumer spending is the jet fuel of economic growth.

Can such optimism be sustained? The answer, as always, is maybe. Their sentiment might hinge on future wage and salary growth, which has picked up some, but not robustly. Earlier this month, the Bureau of Labor Statistics reported that real average hourly earnings for all employees actually decreased 0.1 percent from April to May. That’s because there was a 0.3 percent increase in average hourly earnings in nominal terms, which is well and good, but it was eaten up and then some by the 0.4 percent increase in the CPI. However, without gas prices in the mix, the CPI didn’t really go up that much, so May was something of a wash for consumers. A wash is OK for a few months, but eventually the lack of wage growth’s going to cloud people’s optimism.

There are also macroeconomic wild cards. Will the Greek economic crisis—it’s back, and it’s bad—upset the world economy enough to upset the U.S. economy? Or will the United States, as the usual island of stability, be an indirect beneficiary of the hubbub? There’s no way to know, and besides that, there are other potential international problems that could flummox growth in this country: conditions in China, an overly strong dollar, a blowup in some oil-producing state, and so on. As real estate billionaire Sam Zell said earlier this month at the NAI Global Market Outlook, “I’ve never seen so many black swans.”

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