U.S. economic reports improved quarter-over-quarter. U.S. businesses appear to have emerged from a multi-year earnings slump, with the Q1/Q2 S&P 500 sales and profits showing year-on-year growth for the first time since late 2014. GDP is up 2.8% year-over-year and economic sentiment continues to improve. Key risks include uncertainty on President Trump’s economic policy, geopolitical threats abroad (North Korea, a protectionist Europe, the Middle East) and the Fed’s approach to unwinding it’s balance sheet.
The global economic situation continues to improve as well. Key metrics signal global growth to pick-up modestly through the end of the year and into 2018. Growth is broad based with the recovery in commodity producers helping emerging market countries. There are also signs of rising demand for high-tech goods and investment in capital improvements. Key risks continue to be political in nature as several countries are grappling with general elections where protectionist candidates are making a run for power.
Last quarter we were optimistic about the global economy. 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. Retail Sales through June are up 1.7% year-over-year.
All-in-all, the consumer will steadily propel economic growth through 2017 and into 2018.
|Wholesale Trade – Sunny. Overall, Wholesale Trade is improving. US Total Wholesale Trade was up 3.9% through the 12 months ending in May. The US Dollar is weakening against major global currencies which, in turn, helps make US goods less expensive overseas. Key areas experiencing strength are those in 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 is off to a solid start in 2017. Average Manufacturing Production during the 12 months ending in April rose 0.4% 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. The Federal Reserve raised interest rates again in June, signaling they remain confident in the US Economy despite low inflation. Current inflation, 1.3% thus far in 2017, is below the Fed’s inflation target of 2%. However, with low unemployment and rising wages, we anticipate the inflation will have to eventually rise beyond the 2% mark by the end of the year.
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.
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 – Cloudy. Once again, 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 continue to believe 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. June Housing Starts rose 8.3% from May. Single family housing continues to accelerate, the result of low unemployment, rising wages, and rising consumer confidence. Permits for future construction climbed 4.1% for single family homes and 13.9% for multifamily projects.
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. The World Economic Outlook (WEO) raised its’ 2017 and 2018 global growth projection to 3.5% and 3.6% respectively.
In the Eurozone, Brexit talks have begun but have been an non-event. The UK economy is estimated to have grown 1.8% in 2016, second only to Germany’s 1.9%, despite all the press about leaving the EU. Eurozone manufacturing is on the upswing, led by Austria, the Netherlands and Germany. Likewise, employment growth is running at one of the highest rates seen in the last 20 years.
In the Asia/Pacific region, China’s manufacturing PMI for July hit is 4-month high, topping expectations. Overall, China’s economy grew at 6.9% in the first quarter of 2017. In addition, India’s economy grew at a 6.1% rate during the same quarter.
Emerging Markets saw better than expected growth in some member countries; Mexico, Brazil and South Korea. Due to the relative recovery and subsequent 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.