The U.S. economy continues to do well. It is stable and has proven to be resilient to domestic and global news events. It continues to slowly recover and, according to most economists, should continue to do so through 2017 and into 2018. The employment situation continues to improve; the unemployment rate is 4.7% and remains near cyclical lows. GDP is growing at an annualized rate of approximately 2.1% in 2016 and at a more modest pace of between 1% and 1.5% in the first quarter of 2017. And, inflation is starting to creep higher. Given the positives, the Federal Reserve will likely raise interest rates again in mid-2017. It has now targeted rates between 0.75 percent and 1 percent for this year.
The global economic situation continues to improve as well. European consumer confidence has recovered to its pre-crisis highs and businesses are significantly more confident in their economic outlook. And, now that commodity prices have stabilized and in some cases increased, Emerging Markets economies are seeing a slight resurgence. China, in particular, has been growing at a steady rate since the government introduced policy measures to stabilize their stock markets. This in turn has been a positive for neighboring Asia-Pacific countries.
Last quarter we were cautiously optimistic about our predictions regarding the global election and were vindicated. We continue to believe the worst is behind us, both in the U.S. and globally. 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 consumer is the engine of our economy and when times are good, the economy follows inline. And what’s not to like for the consumer; Wages are increasing, the housing market continues to strengthen, people are getting jobs, borrowing costs are low (for now) and energy prices are low. All-in-all, the consumer will steadily propel economic growth through 2017 and into 2018.
|Wholesale Trade – Partly Cloudy – Chance of Sun. Overall, Wholesale Trade is improving. It is up 1.5% through the 12 months ended February 2017. Key areas experiencing strength are those in the Commodities sector and the Construction sector. In Commodities, the Wholesale Trade of Petroleum and Petroleum Products rose 46.9% during the past quarter. In Construction, the Wholesale Trade of Lumber and Other Construction Materials rose 6.3%.
|Manufacturing – Chance of Sun. Last quarter we reported that manufacturing had started to turn positive. The first quarter 2017 continues this trend. Manufacturing grew at over a 5% seasonally adjust annual rate through the three months ended February. The manufacturing index is at its highest quarterly average in six years. Overall, a positive that we expect to continue to improve through 2017.
|Interest Rates – Partly Cloudy w/Potential for Sun. The U.S. economy is fundamentally sound. The Federal Reserve raised interest rates for the 2nd time in four months and have indicated they would likely continue to raise rates through 2017 and 2018. On a year-over-year basis, inflation continues to slowly creep up. The CPI has risen 2.5% over the past 12 months and the PPI has increase 2.2%, the biggest yearly advance since 2012.
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.
|Capital Goods New Orders – Partly Cloudy w/Potential for Sun. 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 through 2017. And, a general rise in the US Purchasing Manager Index supports the argument that we will see improvement in New Orders later in 2017.
Given the mixed bag of positive and negative reports, we are cautiously optimistic this metric will strengthen as the year progresses.
|Construction – Sunny. It’s the same story as last quarter. Positive news continues for the housing sector. March’s Total Existing Home Sales is 5.9% above year-ago levels and is the strongest month of sales since 2007. Applications to build new, single family homes rose to the highest level since 2007 and Building Permits were up 1% over 2016 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 – Cloudy with a chance of sun. The world economy continues to pick up as the accommodative monetary policy in Europe and Asian countries continue. Eurozone retail sales are starting to pick up, and unemployment fell 140,000 in February. Having said that, there is still room for improvement; unemployment is 10% in France and 18% in Spain. Politically, fears of far-right, anti-immigrant/anti-globalism sentiment, has diminished as France, Austria and the Netherlands saw hard-right candidates lose their political bids. We anticipate political stability moving forward.
The Chinese government has reported their economy continues to grow due to new economic policies. Growth has been reported at 6.8%, within the stated growth path of between 6% and 7% the government has communicated. Other Emerging Market economies have improved on the strength of rising commodities prices.
The IMF maintains the worst is now behind us but with a caveat; new, anti-trade policies could restrict international trade which, in turn, could significantly impact global growth. Export driven economies such as China, Japan and Mexico would be the worst hit by these policies and this could exacerbate domestic imbalances.