Our economic indicators continue to run positive for the first quarter of 2018. Consumer spending, business investments and residential fixed investments rose at a 4.6% annual rate. Gross Domestic Product (GDP), a broad measure of the nation’s overall economic activity has shown consistent growth over the past three quarters; up 3.2% in 2017’s 3rd quarter, 2.9% in the 4th quarter and 2% in the 1st quarter of 2018.
While the economic news is positive, there is now a concern the economy is potential overheating. The period of easy money has come to an end. The Fed is raising interest rates, albeit slowly. However, there are growing employment pressures which have impelled economists and market watchers to voice concern over the potential for rapid inflation. In addition to this, global trade rhetoric and the risk of political gridlock, have marked the return of stock market volatility.
The Eurozone economy finished 2017 with a bang showing growth at the fastest pace since 2007. Year-over-year, GDP in the region grew at a 2.6% pace with Germany and Italy having picked up the pace. The German economy rose 0.8% on the quarter while France, the 2nd largest economy, and Italy both grew at 0.5% on the quarter and 2.2% annualized. However, the economic machine has throttled back to neutral. The tariff debate and other political concerns are primarily to blame. Whether or not this is a passing condition remains to be seen.
Here is a summary of some important economic indicators, showing historical information and areas of potential risk that could threaten the economic recovery in the U.S.A.
Retail Sales – Sunny. The good news continues, quarter over quarter. Overall US Unemployment continues to move lower while Wage Growth continues to increase. Both 2017Q4 and 2018Q1 GDP numbers were fueled by consumer spending. Total Retail Sales are 4.5% above year ago levels.
All-in-all, with the consumer representing 75% of GDP, we believe they will steadily propel economic growth through 2018 and into 2019.
Wholesale Trade – Sunny. US Wholesale Trade is growing at an accelerating rate for both Durable and Nondurable Goods. Increases in commodity prices are partially responsible for the growth with Petroleum and Petroleum Products up 23% Year-over-Year and Trade of Machinery, Equipment and Supplies up 7.9%.
We continue to expect accelerating growth in both durable and nondurable segments through the end of 2018.
Manufacturing – Sunny. U.S. Manufacturing continues to show growth, up 2.4% year-over-year. Foreign demand is supporting domestic production and we are seeing stronger growth in new orders. This is driving a solid increase in outstanding business.
Total Manufacturing Production rose 1.9% in March compared to the same time last year. US Corporate Profits and Capacity Utilization rates continue to rise. Key contributors include the increasing energy production within the US, a strong domestic housing market, and global economic growth.
Interest Rates – Partly Sunny. The U.S. economy is sound and monetary policy is tightening. Although price inflation has continued to run below target, inflation is rising and is set to rise above the Fed’s target of 2% over the course of 2018. The Fed is anticipated to raise rates to between 3.25 and 3.5% by the end of 2019.
While monetary policy is tightening, fiscal policy is loosening. Tax reform and increases in spending will see the general government deficit rise by around 2% points of GDP, pushing up government debt levels. It remains to be seen how this may affect the economy in the next few years.
Capital Goods New Orders – Partly Sunny. Capital Goods New Orders are expected to accelerate but it appears companies are assessing the potential impact of a global trade orotundity. This has resulted in a near-term softening of this metric. Non-Defense New Orders are up 2.2% year-over-year while Shipments for Durable Goods are up 10 out of the 11 months and Inventories are up 20 out of the last 21 months.
Assuming the tariff tiff abates, we anticipate this metric will continue to improve through the end of 2018 and 2019.
Construction – Sunny. It’s the same story as last quarter. Positive news continues for the housing sector. Rising wages, high consumer confidence and historically low costs for borrowing provide support for the housing market.
Residential Construction continues to show growth. Building permits are up 7.5%, Housing Starts are up 10.9% and Housing Completions are up 1.9% year-over-year. Non-Residential Construction is expanding, albeit at a slower, 1.3% rate year-over-year.
Headwinds do persist. Tight inventories of homes are leading to higher housing prices. This, in turn, could deter some would-be buyers. There are also critical shortages; ready-to-build lots are in short supply, skilled labor is hard to find, and rising mortgage rates could negatively impact this metric.
Even with these headwinds, we anticipate construction will continue to be strong through 2018.
International – Partly Sunny. The world economy continues to pick up as the accommodative monetary policy in Europe and Asian countries continue. Once again, the World Economic Outlook (WEO) raised its’ 2018 global growth projection to 3.9% (from 3.7%) based on increased growth momentum and the expected impact of U.S. tax policy.
In the Eurozone, the economy entered 2018 having recorded its fasted expansion in a decade. However, tariff debate, unusual weather and strikes in the eurozone’s two largest members have resulted in a slowdown.
In the Asia/Pacific region, India is expected to become the 5th largest economy in 2018. Strong manufacturing and growth-friendly policies has provided the impetus to positive economic growth. Growth in China is anticipated to slow down as policy support eases and fiscal policies turn less accommodative.
Emerging Markets continued to see better than expected growth mainly due to the recovery and stabilization of commodity prices. Economic growth has been revised upward to over 4.5% on stronger than expected growth in Euro and Asia emerging economics.
Overall, the global economic recovery is on track. Assuming the trade tariff talk is resolved, we anticipate growth will accelerate through the end of 2018. Granted, headwinds persist and the probability of a black swan event is considerably higher for the global economy.