By Gary C. Sanger, Ph.D., CFA
U.S. economic growth remains modest, but we are in the third longest recovery in history. As in the past several years, Q1 economic growth was slow at 1.4%. The Conference Board reported that U.S. leading economic indicators rose 0.3% in May, signaling continued expansion. Unemployment continues to drop, leading most economists to predict stronger wage increases in the near future. Forecasters predict real annualized GDP growth at about 2% for the rest of 2017. Details in several key areas follow below.
Consumers – Unemployment continued to decline over the first half of 2017 from 4.6% to 4.3%, a ten year low. Employers added an average of 121,000 jobs per month through May, down from an average of 194,000 per month in 2016. Hourly wages are up 2.5% over the past 12 months. Housing continues to show strength, as the S&P Case-Shiller index is up 5.5% for the year and prices for new single family homes hit a record of $345,800. Despite slightly higher mortgage rates, the National Association of Realtors reports that existing home sales were up 1.4% in Q1, the fastest growth since 2007. The Conference Board’s Consumer Confidence Index continued higher this year to 118.9 in June, up from 113.7 in December. This reflects continuing improvement in jobs, household wealth and better overall U.S. economic conditions. Personal income rose 0.4% in May, while consumer spending rose only 0.1%. The difference of course is increased savings, which is healthy for the economy in the long run.
Businesses – Business conditions remained steady in the first half of 2017, and the outlook is modestly optimistic. Industrial production rose 2.2% year-over-year in May and although durable goods orders fell in May, they are up 2.8% over the first five months of 2017. The U.S. Institute for Supply Management manufacturing index increased to 57.8% in June, the highest reading in three years. The ISM services index is relatively unchanged over the first six months of 2017, now at 57.5. Measures above 50% indicate expansion for both indexes. Finally, U.S. corporate profits after tax were down 2.8% in Q1, but up 11.5% from the previous year.
Government – While the Trump administration supports policy proposals that are widely perceived as pro-growth, so far little has been accomplished on the fiscal agenda. Lower corporate taxes and higher spending on infrastructure would be pro-growth. However, a tougher stance with major trading partners could offset this if lower exports are the result. Hopefully the picture will become clearer by the end of the year. Regarding monetary policy, the Commerce Department’s price index for personal consumption expenditures increased 1.4% year-over-year in May. This is the lowest reading in six months and the third consecutive decline. Given the Fed’s goals of full employment and stable prices, 2% has been the target for consumer price inflation. Despite low inflation, the Fed raised its benchmark lending rate for the third time in six months, to a range of 1.0% – 1.25% (still historically very low). The Fed believes that low and falling unemployment will eventually lead to rising inflation and modest growth. If the economy continues to perform as expected, the Fed plans additional rate increases this year and into 2018. The Fed also plans to begin reducing the size of its balance sheet by letting existing government and mortgage bonds mature without replacing them. Hopefully this will lead to the final “soft” exit from the stimulus supplied during the financial crisis.
International – The International Monetary Fund’s (IMF) latest World Economic Outlook forecasts that global growth will increase modestly to 3.5% for fiscal 2017 and to 3.6% in 2018. Importantly, though still slow, growth in the Eurozone is accelerating, to around 2% annualized growth in Q1. As a result, signaling optimism, European Central Bank President Mario Draghi indicated that monetary stimulus may begin to taper off. And according to Factset, corporate profits in Europe are up 16.2% for the Stoxx Europe 600 (Europe’s version of the S & P 500). Continued uncertainty surrounding Brexit (The U.K. leaving the European Union) adds uncertainty to the global outlook.
Closing – Both the U.S. and global economies continue on a modest growth track. The impact of the Trump presidency is expected to be positive for growth, but the high level of uncertainty about fiscal and trade policies suggests higher market volatility. The impact of Fed policy (number and size of rate increases) will also play a major role in economic growth going forward. Finally, terrorist activity has picked up especially in Europe, adding uncertainty to the global economic picture.