By Gary C. Sanger, Ph.D., CFA
Welcome to 2018! The most significant economic news since my last letter is passage of the Tax Cuts and Jobs Act. While I could write more about the Act than the space I am allotted, most believe it is business, consumer and growth friendly. Some even believe it could provide too much stimulus, possibly igniting inflation. Even without this fiscal stimulus, U.S. economic growth accelerated in the second half of 2017, and we are in the longest recovery in the post-war era. Following a slow Q1, the U.S. economy grew at a 3.1% rate in Q2 and 3.2% in Q3. The Conference Board reported that U.S. leading economic indicators rose 0.4 percent in November, following a 1.2 percent increase in October, and a 0.1 percent increase in September. These readings signal continued expansion into 2018. Unemployment continues to drop, leading most economists to predict stronger wage increases in the near future. Details in several key areas follow below.
Consumers – The consumer sector continued to gain strength in the second half of 2017. The Federal Reserve reported that U.S. household net worth increased to $96.9 Trillion in Q3 2017, the eighth consecutive quarterly increase. Also, the ratio of household liabilities to net worth is the lowest since 2000. Unemployment continued to decline over the second half of 2017 from 4.3% to 4.1%. This latest reading is at a 17 year low. By contrast, unemployment stood at 10% in the recession’s trough in October 2009. Employers added 228,000 new jobs in November, and employment growth has averaged 174,000 per month so far this year. Hourly wages are up 2.5% over the past 12 months. Housing is gaining strength, as the S&P Case-Shiller index is up 6.2% for the year. The National Association of Realtors reported that sales of new homes in November were 16% higher than a year ago, and sales of previously-owned homes were at the fastest pace since the housing bubble. The Conference Board’s Consumer Confidence Index dropped slightly to 122.1 in December, from 128.6 in November. November’s figure was a 17-year high. The current situation predicts consumer spending will contribute to economic growth in 2018.
Businesses – Business conditions improved in the second half of 2017, and the outlook is increasingly optimistic. Industrial production rose 0.2 percent in November following an increase of 1.2 percent in October. The November figure is 3.4 percent above its year-earlier level. Capacity utilization for the industrial sector was 77.1% in November, which is 2.8% below its long-run average. The U.S. Institute for Supply Management manufacturing index decreased modestly to 58.2% in November, from a 13-year high of 60.8 reached in September. Similarly, the ISM services index decreased to 57.4 in November, from a high of 60.1 in October. Measures above 50% indicate expansion for both indexes. Finally, U.S. corporate profits after tax were up 10% year-over-year in Q3.
Government – After getting tax reform passed, the next priority of the Trump administration is infrastructure. Increased spending on infrastructure would add further fiscal stimulus and contribute to growth. Unfortunately it would likely also contribute to an expanding federal spending deficit, funded with federal debt. Regarding monetary policy, the Commerce Department’s core price index for personal consumption expenditures increased 1.45% year-over-year in October. Inflation continues to hold below the Fed’s 2% target. Despite low inflation, the Fed raised its benchmark lending rate for the fourth time in a year, to a range of 1.25% – 1.50% (still historically very low). If the economy continues to perform as expected, the Fed plans three to four additional rate increases in 2018.
International – The International Monetary Fund’s (IMF) latest World Economic Outlook again revised its forecasts for global economic growth upward. The current forecast is for growth to increase to 3.6% for fiscal 2017 (full year data are not yet available) and to 3.7% in 2018. Upward revisions were largest for the euro area, Japan, emerging Asia, emerging Europe, and Russia. Risks to continued global growth are decreasing, but growth remains weak in several countries. And despite modest acceleration in growth, inflation remains below target levels in most advanced economies.
Closing – Both the U.S. and global economies are growing at an increased pace. The impact of the Tax Cuts and Jobs act is expected to be positive for growth, but the magnitude of the impact is uncertain. The impact of Fed policy (number and size of rate increases) will also play a major role in economic growth going forward. Finally, escalating tensions with North Korea add uncertainty to the global economic picture.