Economic growth is strong around the world. The number of countries with economies that are in a recession are at near all-time lows. The ultra-loose monetary policies that were implemented due to the financial crises a decade ago, have led to an expanding global economy resulting in many countries seeing strong GDP growth. Many regions are seeing low unemployment and higher real wages which is driving consumption. While global inflation is relatively low, it is inevitable it will eventually rise.
In anticipation of rising inflation, central banks around the world are beginning to tighten monetary policy. The U.S. Federal Reserve has already raised interest rates three times this year (and may again in December). And, the Fed’s counterparts in Europe are planning on doing the same.
Domestically, consumer confidence is soaring due to a number of factors including low unemployment, rising wages and improvements in the financial markets. The U.S. is also seeing continued strength in the manufacturing and construction sectors. Additionally, growth in New Orders and Production and Durable Goods numbers continue to improve which bodes well for the future. We anticipate this growth cycle to persist into 2017Q4 and 2018 as the momentum continues.
Globally, the good news also continues. Economic reports on the European economy are increasingly positive even with the political backdrop of the Brexit and Spain seeing the potential for Catalonia to secede. Euro unemployment, while still high, is down to a nine year low of 9.1%. In Asia, China projected 6.9% GDP growth for the year. All-in-all, the major global economies are improving in tandem.
We now believe the best is ahead of us, both in the U.S. and globally. US and global economic growth is beginning to accelerate and should continue to do so throughout 2017 and into 2018.
Here is a summary of some important economic indicators, showing historical information and areas of potential risk that could threaten the economic recovery in the U.S.A.
|Retail Sales – Sunny. The good news continues, quarter over quarter. The story of this quarter is that consumer wages have finally started to find their groove. Overall US Wage Growth is now a robust 3.4%. Given that the Unemployment Rate, currently a low 4.2%, has been running low for quite some time, it was inevitable wages would eventually rise.
Additionally, the housing market continues to strengthen, people who have dropped out of the workforce are now looking for jobs, borrowing costs are low (for now) and energy prices are low. Retail Sales through September are up 3.8% year-over-year.
All-in-all, the consumer will steadily propel economic growth through the end of 2017 and into 2018.
|Wholesale Trade – Sunny. Overall, Wholesale Trade continues to improve. US Total Wholesale Trade improved from 3.9% through the 12 months ending in May to 5.7% in the twelve months through September.
As of the end of the quarter, the US Dollar has weakened against major global currencies which in turn makes US goods less expensive overseas. Key areas experiencing strength continues to be the Commodities sector and the Construction sector.
We expect accelerating growth in both durable and nondurable segments through this year and into 2018.
|Manufacturing – Sunny. Manufacturing continues to chug along through mid-2017. Average Manufacturing Production during the 12 months ending in April rose 0.7% year-over-year. US Corporate Profits and Capacity Utilization rates continue to rise. Key contributors include the increasing energy production within the US, a strong domestic housing market, and global economic growth.
As we predicted last quarter, Manufacturing has turned the corner and is now in growth mode.
|Interest Rates – Partly Sunny. The U.S. economy is fundamentally sound. In our last economic update blog, we predicted inflation would rise above 2% by the end of the year. The current annual inflation rate is now 2.3% which is above the Federal Reserve’s target rate of 2%. The Fed raised rates in June and we believe they will raise rates one more time before the year is out.
Even though consumer wage growth is beginning to accelerate, we continue to believe interest rates will remain low for longer. The Fed will raise rates but they will be increase by only 0.25% each time.
A key unknown is how the Fed will begin unwinding the $4.5 trillion of bonds it holds on its’ balance sheet due its’ intervention in the markets during the Great Recession.
|Capital Goods New Orders – Cloudy. It’s the same story as last quarter — Short term indicators allude to improvement in the industrial sector. Rising Machinery Manufacturing Capacity Utilization Rates indicate activity levels are increasing. Rising US Corporate Profits suggest businesses will be better positioned to place new orders into 2018. And, a general rise in the US Purchasing Manager Index supports the argument that we will see improvement in New Orders – at some point.
Once again, a mixed bag of positive and negative reports. While US Exports are up 1% year-over-year, mainly due to a weak US Dollar, we continue to believe this metric eventually strengthen as the year progresses and into 2018.
|Construction – Sunny. It’s the same story as last quarter. Positive news continues for the housing sector. Total Residential Construction is growing at an accelerating pace. Building Permits are up 2.4% while Housing Starts are up 4.6% from year-ago levels.
However, headwinds do persist. Tight inventories of homes are leading to higher housing prices. This, in turn, could deter some would-be buyers. There are also critical shortages; ready-to-build lots are in short supply, skilled labor is hard to find and rising mortgage rates could negatively impact this metric.
| International – Partly Sunny. The world economy continues to pick up as the accommodative monetary policy in Europe and Asian countries continue. Once again, the World Economic Outlook (WEO) raised its’ 2017 and 2018 global growth projection to 3.6% (from 3.5%) and 3.7% (from 3.6%), respectively.
In the Eurozone, manufacturing activity continues to be strong. However, business activity in the United Kingdom slowed more than anticipated and unemployment continues to be historically high.
In the Asia/Pacific region, China’s manufacturing PMI for July hit is 4-month high, topping expectations. Overall, China’s economy is projected to grown at 6.8% in 2017. Japan’s economy outperformed during the first half of the year.
Emerging Markets continued to see better than expected growth in mainly due to the recovery and stabilization of commodity prices, many EM countries saw economic improvement.
Overall, the global economic recovery is on track. We anticipate growth will accelerate through the end of the year and into 2018. Granted, headwinds do persist and the probably of a black swan event is considerably higher for the global economy.