Economic Update - Q4 2017
As expected, at its September meeting, the Federal Open Market Committee (FOMC) acknowledged that it would begin the process of shrinking its balance sheet by stepping down the pace of reinvestment of maturing bonds. Unexpectedly, it signaled the potential for another four interest rate hikes, which is not currently reflected in the markets. The response to this hawkish tone bears watching.
U.S. equity market investors remain torn between historically lofty valuations coupled with all-time market highs and the recognition that the U.S. economy remains strong and could modestly accelerate with meaningful fiscal stimulus in the form of lower taxes. Outside of the U.S., stocks are more attractively valued, but the spread is narrowing modestly.
Exogenous forces such as the tenuous situation in North Korea, the ongoing saga of Russian influence in the politics of other nations, and the impact of multiple major hurricanes in the Caribbean colored the lens for investors in the third quarter, but appear at this point unable to upset the proverbial apple cart of optimism around the global economy. As a result, risk assets remain in demand.
Second quarter 2017 U.S. GDP came in at +3.1% year-over-year, better than initially expected. Driving growth was consumer spending, which increased +3.3%, as did business spending, up +8.8%, and inventories were also modestly positive. Housing remains somewhat subdued, as was export growth. Expectations are for growth to slow to +2.2% in the third quarter, as disruption from Hurricanes Harvey and Irma make an impact. However, this will likely be offset over the course of the next several quarters as rebuilding occurs.
Manufacturing strengthened in the third quarter, as the Institute for Supply Management’s (ISM) manufacturing survey rose to 60.8 in September, its best reading since May 2004. The increase from August was driven by higher prices, an increase in supplier deliveries, and stronger new orders. European and Chinese manufacturing also ticked higher in September, as China’s Purchasing Managers’ Index (PMI) hit a five-year high of 52.4 and output and new orders were stronger across all major markets in Europe.
Consumer confidence faltered in September, after the University of Michigan gauge of consumer sentiment peaked in August. However, rebuilding efforts are expected to improve job prospects in the Southeast, which may boost the expectations component of the measure. Employment remains strong, despite a hiccup in September’s non-farm payrolls, which declined by -33,000 jobs in the wake of Hurricanes Harvey and Irma. The unemployment rate fell to 4.2%, however, which marks the lowest it has been since February 2001, and this dynamic continues to fuel consumption.
*please note, Q3 2017 GDP is estimated.
View all Articles in this Issue:
View Other Articles in this Issue: