1 st Quarter 17 EXECUTIVE SUMMARY The U.S. economy grew by a lackluster 1.6% for the full year 16 its slowest pace since 11. While growth in the past year was a full percentage point lower than in 15, expectations are for a pickup in the pace of growth for 17. Inflation increased to its highest annual pace since March 12, as CPI increased at a 2.7% year-over-year rate. Higher energy prices had been the primary driver of headline inflation over the past 6 months, but its impact should prove transitory as energy prices have stabilized. As widely expected, the Federal Reserve raised shortterm interest rates in March, citing an economy near full employment and inflation trending in a territory that would support further rate hikes later this year. The Fed has indicated intentions for two more rate increases in 17, as well as an eventual reduction of its balance sheet. The economy added an average of 187, jobs per month in 16 and continues to show progress into 17, averaging 178, new jobs per month in Q1. The unemployment rate, at 4.5%, is at its lowest level since May 7. For real-time updates on incoming economic data as it s released throughout the quarter, please visit our blog at market-perspectives-blog.pmfa.com. JIM BAIRD CPA, CFP, CIMA Partner, Chief Investment Officer TRICIA NEWCOMB CIMA Associate, Senior Strategy Analyst Economic Dashboard Gross Domestic Product Prior Reading Change Most Recent Real GDP QoQ - Q4 (Final) 3.5% 2.1% Personal Consumption QoQ - Q4 (Final) 3.% 3.5% Employment Market Unemployment Rate - February March 4.8% 4.7% 4.7% 4.5% February 238K 4.5% Nonfarm Payrolls (Change) - March 219K 235K 98K 98K Initial Initial Jobless Jobless Claims Claims 4-Week 4-Week Avg Avg - March March 246.5K 254.5K 254.5K 254.3K 25K 25K Continuing Jobless Claims 4-Week Avg Continuing Jobless Claims 4-Week Avg - 3.8K 32K March 3.8K 3.8K 23K March 23K Inflation Inflation CPI YoY February 2.5% CPI YoY - February 2.5% 2.7% Core CPI YoY February 2.3% 2.7% Core CPI YoY - February 2.3% 2.2% Core PCE YoY - January February 1.7% 1.8% 2.2% Core PCE YoY - February 1.8% 1.7% 1.8% 1.8% Consumer Indicators Consumer Indicators Retail Sales YoY - February 6.% Retail Sales YoY - February 6.% 5.7% Consumer Credit YoY - January 6.5% 5.7% 6.3% Consumer Credit YoY - January 6.5% January 3.6% Personal Income YoY - February 4.1% 6.3% 4.% 4.6% Personal Income YoY - February 4.1% Personal Savings YoY - January February 5.4% 5.5% 4.6% 5.6% Personal Savings YoY - February 5.4% Consumer Confidence - March 116.1 5.6% 125.6 Consumer Confidence - March 116.1 125.6 Business & Production Indicators Business & Production Indicators ISM Manufacturing Index - March 56. 57.7 57.7 57.2 ISM Manufacturing Index - March 57.7 ISM Services Index - March 56.5 57.2 57.6 ISM Services Index - March 56.5 Industrial Production YoY- February.2%.1%.3%.4% 57.6 Industrial Production YoY- February.1% Small Business Optimism - March 15.9 15.3.4% Small Business Optimism - March 15.9 Housing 15.3 Market Housing Existing Home Market Sales - February 5.69MM 5.48MM Existing Home Sales - February Housing Starts - 5.69MM February 1251K 1288K 5.48MM Housing S&P Case-Shiller Starts - February Price Index YoY- 1251K 5.5% January 5.7% 1288K S&P Case-Shiller Price Index YoY- 5.5% January 5.7% Leading Indicators Leading ECRI Weekly Indicators Leading Index - March 145.4 144.6 ECRI Conference Weekly Board Leading Leading Index Economic - March 145.4 Index - 125.5 March 126.2 144.6 Conference Board Leading Economic 125.5 Index - March 126.2
2 OVERVIEW The phrase Great Expectations is most typically associated with the acclaimed novel by Charles Dickens, but those two words could also provide an apt description of the economy today. Since November s presidential election, confidence levels have soared in anticipation of Trump s pro-growth economic agenda. Despite surging sentiment levels, however, so-called hard data (non-survey based indicators) have yet to follow. While the economy appears to be on strong footing, the question remains, will hard data figures catch up to current expectations? As the chart illustrates below, economic data can be separated into two broad categories: hard and soft data. Hard data is made up of primarily physical measures of the economy: GDP, inflation, and employment figures, for example. Soft data, on the other hand, is derived from surveys of both businesses and consumers. Among the most widely followed measures of expectations is the Consumer Confidence Survey. In its most recent release (March), the index reached a 16-year high as an increasing number of participants indicated that they expect the economy and job prospects to improve over the next six months. This bodes well for continued economic growth, given the strong correlation between confidence and consumer spending (which accounts for over two-thirds of GDP). Similarly, small business expectations, collected by the National Federation of Independent Business, have reached their highest level since 4. Optimism rose dramatically following the election, with respondents projecting an increase in hiring and business investment. In contrast to surging confidence levels, actual economic data has not indicated a meaningful departure from the status quo it s been meeting, but not materially exceeding, expectations. However, it s not uncommon for survey indicators to advance before hard data eventually follows. Thus, if history is a guide, economic growth could be primed to accelerate in the near-term, as high levels of confidence may ultimately render increased spending or business investment. The tremendous amount of uncertainty surrounding the details of the current administration s economic agenda, not to mention their ability to effectively implement those plans, remains a wild card today. Yet, even if the implemented policies are less accommodative than initially expected, the end result should be a net positive for the economy. Overall, economic fundamentals appear relatively positive today. Whether hard data begins to surpass expectations, or expectations ultimately come back down, the expansion appears to be on a positive trajectory for the coming quarters. For more information on the state of the current economic expansion, we encourage you to read our special commentary, The Expansion Reaches a Milestone. Index 2. 2. 1.5 1.5 1. 1..5.5.. -.5 -.5-1. -1. -1.5-1.5-2. -2. GAP BETWEEN HARD ECONOMIC DATA AND EXPECTATIONS REACHES NEW HIGH Bloomberg "Hard Data" Bloomberg "Hard Data" Bloomberg "Soft Data" Bloomberg "Soft Data" Soft data is comprised of the Bloomberg surprise index for business and consumer surveys. Hard data is comprised of the Bloomberg surprise indexes for housing, industrial, labor, household and retail data. Source: PMFA, Bloomberg INSIGHTS In recent months, business and consumer surveys have surged amid expectations that the Trump administration will take measures, such as deregulation and tax reform, which will support the economy and accelerate growth. Although expectations have soared, hard data (or actual economic activity), has not followed suit. The chart to the left outlines the wide dispersion between the current soft (survey) data and hard data, reaching the highest level since 11. While survey results have far surpassed expectations, hard data has been simply meeting expectations. It is hard to deny that President Trump has bolstered a renewed optimism about the U.S. economy, but only time will tell whether or not these high expectations will eventually become economic reality.
3 GROSS DOMESTIC PRODUCT Q2 Q1 Final Q3 Q2 Final Q4 Q3 Final Real GDP QoQ 1.4%.8% 3.5% 1.4% 2.1% 3.5% Personal Consumption QoQ 4.3% 1.6% 3.% 4.3% 3.5% 3.% The U.S. economy expanded at a 2.1% annualized rate during Q4, down meaningfully from 3.5% the prior quarter. Personal consumption was once again the largest driver of growth this quarter, rising by 3.5%. While consumer spending has been the primary driver of economic growth over the past several years, other areas may be gaining steam. Given the expected fiscal policies under the Trump administration, areas such as government spending or private investment could provide a welcome boost to overall growth in the coming quarters. As the chart illustrates, business optimism has recently surged on the expectation for deregulation and reduced taxes. Historically, sentiment has been a powerful force, as business spending has tended to follow optimism levels either higher or lower over time. The recent uptick bodes well for economic growth in the coming quarters. Percent (YoY % Change) 25 15 1 5-5 -1-15 - -25 SMALL BUSINESS OPTIMISM SOARS; BUSINESS INVESTMENT TO FOLLOW? NFIB Small Business Optimism Index Small Business Actual Capital Expenditures Small business actual capital expenditures is represented on a nine-monthlagged basis Source: PMFA, National Federation of Independent Business (NFIB) INFLATION December January February Consumer Price Index YoY 2.1% 2.5% 2.7% Producer Price Index YoY 1.6% 1.6% 2.2% The CPI increased.1% for the month of February, while the year-over-year change rose to 2.7%. Core CPI increased 2.2% over the last 12 months, lifted primarily by rising costs for shelter and medical care. With energy prices stabilizing after picking up from their recent lows, the energy price index rose 15.2% the largest 12-month increase since September 11. Barring any major changes in energy prices, the current inflationary impact of energy should be transient. Inflation expectations appear to be rising, not just in the U.S., but across the globe. Inflationary pressures were already edging upward before the U.S. presidential election, but have surged in the aftermath. In fact, December 16 marked the first time that actual global inflation exceeded expected inflation since 12. While inflation has picked up domestically, it currently stands near the Fed s target, which historically has been a level supportive of economic growth. Index 5 4 3 1-1 - -3-4 -5 GLOBAL INFLATION HIGHER THAN EXPECTED FOR FIRST TIME SINCE 12 Above Expectations Below Expectations CITI Global Inflation Surprise Index Source: PMFA, Citigroup
4 INTEREST RATES Treasury Yields as of 12/31/15 3/31/16 6/3/16 9/3/16 12/31/16 3/31/17 3-month.26%.16%.26%.51%.51%.76% 2-year.58% 1.6%.58% 1.% 1.% 1.27% 1-year 1.49% 2.27% 1.49% 2.45% 2.45% 2.4% Long-term interest rates were range bound during Q1, as the 1-year Treasury yield hovered between 2.3% and 2.6%. Ultimately, the 1-year yield ended the quarter at 2.4%, essentially unchanged from the start of the year. The Federal Open Market Committee (FOMC) voted to increase the federal funds rate by.25% in March, marking the second rate increase in just four months, after only one increase in the previous decade. Currently, median expectations from the Fed s projections are calling for two additional rate hikes in 17. As shown in the chart, beyond 17 the Fed currently projects an additional three rate hikes in 18 before ultimately settling on a long run projection of 3%. When compared to history, the 3 bps increase in rates would be in line with the average hiking cycle over the past 3 years. Meanwhile, market expectations continue to price in lower long-term rates. 22. 15.. 18. 325 bps 16. 14. 375 bps 12. 8. 5. 6. 4. 2... Yield (%) FEDERAL RESERVE POISED FOR MORE RATE HIKES IN 17 3 bps 175 bps Current Spread: 19 bps 425 bps 3% Federal Funds Rate Effective Fed Funds Rate 1-Yr Treasury Yield Fed's Median Rate Projection Market Expectations Fed's Longer Term Rate Projection Source: PMFA, Federal Reserve, CME Group EMPLOYMENT January February March Unemployment Rate 4.8% 4.7% 4.5% Nonfarm Payrolls (Change) 216K 219K 98K Despite a soft March reading, growth in nonfarm payrolls improved in Q1, as the economy added an average of 178, jobs over the past three months higher than the prior quarter s average monthly pace of 148, new jobs. Meanwhile, the unemployment rate reached its lowest level since May 7, dipping to 4.5% in March. Based on the latest University of Michigan Consumer Sentiment survey, more people expect the unemployment rate to decline today than at any other point in the last 3 years. However, at 4.5% what some economists consider to be near full employment it s unlikely that the unemployment rate will materially decline from here. Still, higher consumer sentiment has historically been correlated with higher consumer spending which should bode well for economic growth, even if it doesn t translate into lower unemployment in an already fairly tight labor market. 11. LARGEST SHARE OF CONSUMERS SINCE 1984 EXPECT UNEMPLOYMENT TO DECLINE FURTHER 9. 8. 7. 6. 5. 4. 3. U.S. Unemployment Rate Share of U.S. Consumers Expecting Unemployment to Decline Further Source: PMFA, University of Michigan, Bureau of Labor Statistics 45 4 35 3 25 15 1 5
5 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.