Economic Update - Q3 2017
- Financial Planning
With three interest rate hikes expected for this year, it was not surprising that the Federal Open Market Committee voted to raise rates in its June meeting. More uncertain, however, are the expectations for additional hikes later this year and into 2018. The Fed's balance sheet may start to contract over the latter half of the year, as maturing securities would no longer be invested, and this unwinding could create unintended consequences.
Equity market investors, both in the U.S. and internationally, appear unmoved by a combination of factors that could act as a catalyst for a market correction, not least of which are what most see as lofty valuations, especially in certain parts of the market. However, valuations alone are unlikely to derail the current rally, and investors are eyeing Washington warily instead.
Beginning with last year's Brexit vote and a spate of elections looming on the horizon at the beginning of 2017, investors looked across the proverbial pond with skepticism. However, the Macron victory in France assauged populism concerns and, when combined with a strengthening economy and attractive valuations, Europe appears once again the place to be.
U.S. GDP for the first quarter of 2017 came in at +1.4% year-over-year; compared with +2.1% in the fourth quarter and yet another lackluster showing to start the year. Driving growth was consumer spending, which grew at +1.1%, as well as exports, which were up +7%; fixed investments remained subdued.
Prospects for the second quarter are much better, with year-over-year growth of approximately +2.5% to +3.0% expected.
Manufacturing softened modestly int he months of April and May, fueling concerns that continued gains in output would be difficult at this point in the cycle. However, the Institute for Supply Management's manufacturing survey posted a 57.8 reading for June, up from 54.9 in May; improvement was across the board in almost all of the underlying components of the measure.
In Eurpope, there has been no evidence of softness, as manufacturing PMI hit a multi-year high in June of 57.4, perhaps indicating that an increased demand for inexpensive credit is meeting the ECB's desired outcome of reinvestment in the economy.
Consumer confidence rose once again in June, hitting 188.9; this rise followed by a decline in May which economists expected to continue to start the summer. While overall a positive move, the underlying data reflected modest softening in the near-term outlook outside of the labor market, and did not point to expectations for accelerating growth.
On the house front, existing home sales have been uneven thus far in 2017, driven in many markets by a lack of supply and rising prices, rather than rising mortgage rates.
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