Economic Perspectives 3 rd Quarter 2017 Executive Summary The final estimate of Q2 GDP indicated that the economy grew at a 3.1% rate, the highest quarterly growth rate since Q1 of 2015. Consumer spending rebounded from a disappointing Q1, growing at a pace of 3.3%. Inflation remained in check during the third quarter as CPI increased at a 1.9% year-over-year rate. Increases in the costs of gasoline and shelter accounted for nearly all of the increase in the 12-month period ending in August. After raising short-term interest rates at its June meeting, the Federal Reserve continued to indicate intentions for one more rate hike in 2017, citing an economy approaching full employment and inflation comfortably moving toward its target despite recent transitory weakness. The Fed has exhibited transparency as it begins its massive balance sheet unwind, hoping to ease the impact on markets. Job growth remains healthy despite storm season hurting Q3 numbers, with the economy losing 33,000 jobs in September. The average monthly job growth of 148,000 thus far in 2017 is only modestly lower than the 2016 average of 187,000. The unemployment rate, at 4.2%, fell to its lowest level in 16 years. For real-time updates on incoming economic data as it s released throughout the quarter, please visit our blog at plantemoran.com/market-perspectives-blog. Economic Dashboard Gross Domestic Product Prior Reading Change Most Recent Real GDP QoQ - Q2 (Final) 1.2% 3.1% Personal Consumption QoQ - Q2 (Final) 1.9% 3.3% Employment Market Unemployment Rate - September 4.4% 4.2% Nonfarm Payrolls (Change) - September 169K -33K Initial Jobless Claims 4-Week Avg - September 277.8K 268.3K Continuing Jobless Claims 4-Week Avg - September 1950.3K 1947K Inflation CPI YoY - August 1.7% 1.9% Core CPI YoY - August 1.7% 1.7% Core PCE YoY - August 1.4% 1.3% Consumer Indicators Retail Sales YoY - August 3.5% 3.2% Consumer Credit YoY - July 5.8% 5.9% Personal Income YoY - August 2.6% 2.8% Personal Savings YoY - August 3.6% 3.6% Consumer Confidence - September 120.4 119.8 Business & Production Indicators ISM Manufacturing Index - September 58.8 60.8 JIM BAIRD CPA, CFP, CIMA Partner, Chief Investment Officer TRICIA NEWCOMB CIMA Associate, Senior Strategy Analyst ISM Services Index - August 53.9 55.3 Industrial Production YoY- August 2.4% 1.5% Small Business Optimism - September 105.2 105.3 Housing Market Existing Home Sales - August 5.44MM 5.35MM Housing Starts - August 1190K 1180K S&P Case-Shiller Price Index YoY- July 5.6% 5.8% Leading Indicators ECRI Weekly Leading Index - September 143.4 143.7 Conference Board Leading Economic Index - August 128.3 128.8 1
Overview As the old maxim goes, no news is good news - and from an economic data standpoint, the third quarter presented much of the same (relatively positive) story that s been told for the past several quarters. GDP accelerated substantially from the first quarter on the back of stronger consumer spending. Consumers remain relatively comfortable with their nearterm financial prospects, as sentiment trends near all-time highs seen earlier in the year. Looking ahead to Q4, sentiment and other measures of consumer confidence will be important to watch heading into the holiday spending season. Labor market strength has also endured, despite the weak weather-related reading in September, as the economy added an average of 91,000 jobs per month over the quarter. While the unemployment rate fell to a 16-year low last month, wage growth has been somewhat elusive. With the economy running at or near full employment, wages would be expected to rise, as a more limited supply of available workers forces employers to offer higher wages to attract talented employees. Tightening labor market conditions and continued economic growth have been expected to put upward pressure on inflation, but to this point, results have come up short. As wage growth remains elusive, core inflation continues to persist below the Fed s target rate of 2%. As the Fed s pursuit to normalize rates continues, it seems committed to taking a slow and steady approach to ensure overly-aggressive actions do not stall the current expansion. Expectations point to one additional rate hike this year following September s Federal Open Market Committee meeting. In addition, the Fed provided greater clarity on its balance sheet renormalization process. In effect, the central bank will begin the process of unwinding its balance sheet by slowing down the reinvestment of maturing securities. While the effects of the policy change are yet to be seen, the Federal Open Market Committee remains confident in the resilience of the economy in the near-term. Aside from economic data, the past three months have been particularly newsworthy. Hurricanes Harvey, Irma, and Maria swept across the southern coast of the United States and Caribbean causing an unprecedented amount of devastation. While the damage is extensive and will require significant resources to rebuild, respondents to an ISM manufacturing survey following Hurricane Harvey expected limited longterm impact. On the legislative front, a renewed focus on tax reform in Congress appears to have provided some clarification on the areas of focus for the Trump administration, although the timing of a proposal and other specifics are still unclear. For more details, check out the Plante Moran Tax team s summary of the Big Six framework that was released at the end of September, available on our website. All in all, economic indicators are generally supportive of continued growth in the coming quarters. While the current expansion has also been amongst the longest in post-wwii history, it has also been one of the weakest and seemingly has room to run from here as early signs of recession do not appear present. Level 60 58 56 54 52 50 48 46 A SYNCHRONIZED GLOBAL EXPANSION Japan Composite PMI UK Composite PMI U.S. Composite PMI Eurozone Composite PMI China Composite PMI Source: PMFA, Markit Insights From a global perspective, growth appears to be primed around the world. The chart on the left outlines several of the major global economies Purchasing Managers Index (PMI). PMI is a measure of the health of a manufacturing sector, and therefore, an indicator of the health and viability for future expansion of the overall economy. Typically, a level of 50 or above is indicative of an economy that is in expansionary territory. Many of the largest economies around the world have been well within expansionary territory for over a year. This synchronized global expansion is supportive of the continued expansion in the U.S., as a large portion of U.S.-based companies derive profits from economies outside of the United States. 2
Gross Domestic Product Q4 Final Q1 Final Q2 Final Real GDP QoQ 1.8% 1.2% 3.1% Personal Consumption QoQ 2.9% 1.9% 3.3% The U.S. economy expanded at a 3.1% annualized rate during the second quarter, more than double the previous quarter s rate of 1.2%. Consumer spending served as the primary driver of Q2 GDP, rising 3.3%. Second quarter GDP growth rebounded nicely after the soft first quarter, consistent with the recurring phenomenon of the last two decades whereby Q1 GDP growth has been abnormally low. The Conference Board Leading Economic Index (LEI), an indicator used to signal business cycle peaks and troughs, recently surpassed its previous high. Historically, the LEI tends to continue rising for multiple years after surpassing a previous high. In addition, recessionary periods have typically been preceded by a dip in the LEI, which has yet to be seen during our current expansion. 140 130 120 110 100 90 80 70 60 50 40 HISTORICALLY, EXPANSIONS EXTEND WELL BEYOND PRIOR PEAKS 7 Years 8 Years Recession 4 Years Leading Economic Index Source: PMFA, The Conference Board, National Bureau of Economic Research (NBER) Inflation June July August Consumer Price Index YoY 1.6% 1.7% 1.9% Producer Price Index YoY 2.0% 1.9% 2.4% CPI decreased 0.4% for the month of August, while the year-over-year change accelerated to 1.9%. Core CPI, which removes the impact of more volatile food and energy prices, remained at a 1.7% year-over-year rate for the fourth month in a row. The primary drivers of inflation were gasoline and shelter, which rose by 6.3% and 0.5%, respectively. Core inflation got a modest tailwind from increases in the costs of vehicle insurance, medical costs and recreation, while declining prices for airfare and used vehicles partially offset that increase. Since the end of the financial crisis, nominal GDP growth has been stuck in a state of low, albeit steady, growth. In this lower-than-average growth environment, wage growth has been relatively subdued compared to historical averages. If muted economic and wage growth become the norm, it is reasonable to expect inflation to also be lower for longer. On the flip side, higher GDP growth could lead to higher wages, which is likely to have an inflationary impact. Percent (QOQ%) 7% 5% 3% 1% -1% -3% -5% NOMINAL GDP REMAINS BELOW PRE-2008 AVERAGES WAGES HAVE FOLLOWED SUIT Nominal GDP ECI: Compensation Source: PMFA, Bureau of Economic Analysis (BEA), Bureau of Labor Statistics (BLS) 3
Interest Rates Treasury Yields as of 3/31/2017 6/30/2017 9/30/2017 3-month 0.76% 1.03% 1.06% 2-year 1.27% 1.38% 1.45% 10-year 2.40% 2.31% 2.31% Long-term interest rates remained range bound during Q3, as the 10-year Treasury yield hovered between 2.0% and 2.4%. Ultimately, the 10-year yield settled at 2.31% as of 9/30/17, the exact same level where it started the quarter. The Federal Open Market Committee (FOMC) voted to maintain the target range for the federal funds rate at 1-1.25% in September, maintaining a relatively accommodative stance. Currently, median expectations from the Fed s projections are calling for one additional rate hike in 2017; however, further tightening may result from the reduction in the Fed s balance sheet expected to begin in October. The Fed continues to stress that its decisions will be datadependent. Looking at the high-level data, it appears that the Fed has been successful in achieving its targeted level of employment, but inflation remains below its 2% target. While the Fed recently maintained its accommodative stance, the upcoming balance sheet normalization program could put upward pressure on interest rates. 2.0 1.0 0.0-1.0-2.0-3.0-4.0-5.0 FED ACHIEVES EMPLOYMENT TARGET, WHILE LOW INFLATION PERSISTS Inflation vs. Fed Target Over Target Under Target Unemployment vs. Fed Target Source: PMFA, BLS, Federal Reserve Employment July August September Unemployment Rate 4.3% 4.4% 4.2% Nonfarm Payrolls (Change) 138K 169K -33K Growth in nonfarm payrolls cooled slightly in the third quarter, as storm season forced September job growth into negative territory. However, average yearly job growth remains strong, and in line with post-financial crisis levels. The unemployment rate ended the third quarter at 4.2%, breaking through its recent floor of 4.3% and marking its lowest level since 2001. U.S. economy is currently on pace to add an average of 148,000 jobs per month in 2017, slightly lower than the 2016 monthly average of 187,000. As the chart illustrates, this change is a continuation of the gradual down-trend since 2014. However, this trend may not be cause for concern, as it could indicate that the economy has reached full employment a development which may be supportive of increased wage growth. While the trajectory of job growth suggests that we are late in the cycle, the current level of growth appears sustainable barring an economic slowdown. Thousands 700 600 500 400 300 200 100 0-100 SLOWING JOB GROWTH NOT CAUSE FOR CONCERN Nonfarm Payrolls 12-Month Average Payrolls Source: PMFA, BLS 4
Past performance does not guarantee future results. All investments include risk and have the potential for loss as well as gain. Data sources for peer group comparisons, returns, and standard statistical data are provided by the sources referenced and are based on data obtained from recognized statistical services or other sources believed to be reliable. However, some or all information has not been verified prior to the analysis, and we do not make any representations as to its accuracy or completeness. Any analysis nonfactual in nature constitutes only current opinions, which are subject to change. Benchmarks or indices are included for information purposes only to reflect the current market environment; no index is a directly tradable investment. There may be instances when consultant opinions regarding any fundamental or quantitative analysis may not agree. Sources for the Economic Dashboard include PMFA, Bureau of Economic Analysis (BEA), Bureau of Labor Statistics (BLS), U.S. Department of Labor, U.S. Census Bureau, Federal Reserve, The Conference Board, Institute for Supply Management (ISM), National Federation of Independent Business (NFIB), U.S. Department of Housing and Urban Development, National Association of Realtors, Standard & Poor s (S&P), and the Economic Cycle Research Institute (ECRI). Plante Moran Financial Advisors (PMFA) publishes this update to convey general information about market conditions and not for the purpose of providing investment advice. Investment in any of the companies or sectors mentioned herein may not be appropriate for you. You should consult a representative from PMFA for investment advice regarding your own situation. 5