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The final estimate of 1Q18 economic growth came in at 2.0% q/q annualized, slightly below consensus. Monthly data on retail sales, homebuilding, durable goods, international trade and inventories point to a rebound to north of 4% growth annualized in Q2, boosting year-over-year real GDP growth to 3.0%+. We expect growth to maintain this solid pace over the next few quarters before slowing in the second half of 2019, reflecting fading fiscal stimulus and higher interest rates.
In June, the unemployment rate rose to 4.0% due to a 601,000 increase in the civilian labor force rather than job losses. In addition, 213,000 new payroll jobs were added and the prior two months were revised upward by 37,000 jobs. Average hourly earnings for production and non-supervisory workers rose 2.7% year-over-year , slightly down from the initially reported 2.8% for May. On balance, the employment report showed contiunued labor market strength . As strong consumer demand clashes with weak labor demographics, this should lead to wage growth acceleration, rising labor force participation and productivity growth and , eventually, slowing economic growth.
The bulk of the 1Q18 earnings season is now behind us. With 501 companies having reported (99.9% of market cap), our current estimate for 1Q18 earnings is $36.68 ($29.97 ex-financials). This represents a 27.3% y/y growth rate, with strength in energy, financials, industrials, technology and telecom. Earnings surprises, a measure of by how much companies beat earnings estimates, remain at all-time highs. This, combined with strong economic fundamentals and the impact of tax reform, should support double-digit earnings growth this year.