Outlook and Market Review - Second Quarter 2015

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The U. S. economy grew at a modest 2.3% rate in the second quarter according to the preliminary report of the Bureau of Economic Analysis. First quarter growth was revised upward to 0.6% from the initial report of -0.2%. Consumer spending continues to lead growth even though personal disposable income only grew by 1.8% in the second quarter. The savings rate fell to 4.8% as consumer spending outpaced income. Key headline measures of the labor market have been good with the unemployment rate falling to 5.3% in July and monthly job gains averaging 246,000 over the past 12-month period. Job gains in July were more modest but respectable at 215,000. Less positive labor market news comes from a continued decline in the labor force participation rate, which is now only 62.6% in July. Labor compensation is not yet consistent with a tight labor market. Wages and salaries fell 0.2% in the second quarter following an anemic 0.7% increase in the first quarter. On a year-over-year basis, wages and salaries have increased a modest 2.1%. The Employment Cost Index, which includes wages and salaries as well as benefits, also had a 0.2% increase in the second quarter. As we approach seven years after the Great Recession, the economy still has a lot of ground to cover before reaching full employment. With soft compensation data in combination with a capacity utilization rate of only 78.4%, it appears that the U-3 unemployment rate will need to fall to the 4.8% to 5.0% range before bottlenecks and excess demand introduce unhealthy inflation.