All indicators are now pointing, more or less, in a positive direction for the U.S. economy. The consumer continues to be in the driver’s seat, enjoying low energy prices, low borrowing costs (for now anyway), rising wages and a strong housing market. As far as the economy is concerned, the elections were a non-event. Although there is continuing angst in the media about the new administration, there has been few, if any, changes in our economic forecast. The main concern we have at this moment, from a political perspective, is the potential impact of the canceling of NAFTA and TPP (Trans-Pacific Partnership) on tariffs and the cost of doing business internationally for U.S. companies.
Internationally, we are seeing improvement across the board for the most part. There are areas of weakness but these are in minor regions of the European Union. Both Germany and the U.K. are posting better than expected economic numbers and we expect that to continue.
Emerging Markets continue to muddle through their economic malaise. Commodity prices have stabilized and recent GDP data from several countries show improvement. While there are still many potential issues, it appears the worst is over for Emerging Market economies.
Last quarter we were cautiously optimistic about our predictions regarding the elections and were vindicated. We continue to believe the worst is behind us, both in the U.S. and in Europe. Global economic growth is beginning to accelerate and should continue to do so throughout 2017.
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 consumer continues to be 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 well into 2017.
Wholesale Trade – Partly Cloudy – Chance of Sun. Businesses appear to be investing for future demand. Business inventories are starting to rise, indicating businesses anticipate future demand for their products. This in turn may drive improvement in economic output. While a continuing strong U.S. Dollar makes U.S. goods and services more expensive for foreign buyers, we anticipate U.S. demand will more than make up the slack.
Manufacturing– Partly Cloudy – Chance of Sun. We are starting to see a modest recovery. Reports from the 12 Federal Reserve Banks are showing manufacturing growth across the board. And, orders for Core Capital Goods have risen now for two consecutive months. Politically, the new administration is pushing/promoting infrastructure spending which should drive the need for additional manufacturing. All of this indicates further growth throughout the rest of 2017.
Interest Rates – Partly Cloudy w/Potential for Sun. The U.S. economy is fundamentally sound. And the Fed continues to manage to its dual mandates; 2% inflation and maximum employment. Additionally, global markets are stable (for the time being) and foreign central banks continue to pump money into their economies. Brexit and the elections have come and gone, having little long term impact on global financial markets. All signs are positive for at least two rate hikes in 2017.
Capital Goods New Orders – Partly Cloudy. At this juncture, a mixed bag of positive and negative reports. U.S. Corporate Profits have risen 2.1%. This indicates companies may be more willing to spend on capital projects. On the other hand, Nondefense Capital Goods New Orders are down 4% year-over-year. The negative tilt of this metric appears to have abated somewhat. We are cautiously optimistic this metric will strengthen as the year progresses.
Construction – Sunny. It’s the same story as last quarter. More people are looking to buy a home but the inventory of homes available for sale is limited. This is causing home prices to go up, on average, 5% in 2016. This in turn will spur home builders to build more homes leading to more sales. Housing Starts are up 5.7% and Building Permits are up 1% over 2015 rates.
International – Cloudy with a chance of sun. Global economic data is mostly positive for the 4th quarter due to a combination of improved conditions in emerging market countries and stronger growth in developed economies. In the Eurozone, the U.K. and Germany both reported better than expected economic news. In Asia/Pacific region, Japan reported rising exports (5.5% increase YoY) and trade surpluses. Emerging Market economies showed continuing signs of greater stability which bodes well for the future.
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.