Once again, the economic metrics we follow indicate growth is strong around the world. The ultra-loose monetary policies that were implemented due to the financial crises a decade ago have led to an expanding global economy resulting in many countries continuing to see strong GDP growth. Labor markets are solid, global trade is healthy and commodity prices are higher. All of which have led to the best global growth in over seven years.
The U.S. economy is benefiting from a job market that continues to improve. Unemployment is at a historical low of 4.1% and wages are slowly rising - and should continue to do so at an accelerating rate in 2018. Housing is often the greatest indicator of how the consumer feels about the economy. Construction continues to be strong as existing home sales hit an annual rate of 5.81 million homes in November 2017, the highest level since 2006. This is still well below the levels seen in 2005 during the construction boom times. And, U.S. GDP has been revised upward to 3.2% for 2018.
Globally, the good news also continues. The International Monetary Fund reported that economic expansion has spread to 210 countries. In several, growth rates exceeded those of the U.S. According to the World Economic Forum, 2017 GDP growth in Germany, Canada, France, and the United Kingdom outpaced that of the U.S. The European economy is expanding at the fasted pace in over a decade. The Japanese economy continues to see strong economic growth on the back of resilient global trace and loose financial policies while emerging market economies are improving due to rising commodity prices.
In anticipation of rising inflation, central banks around the world are beginning to tighten monetary policy. The U.S. Federal Reserve has already raised interest rates four times in 2017. And the Fed’s counterparts in Europe are planning on doing the same at some point in time.
We now believe the best is ahead of us, both in the U.S. and globally. US and global economic growth is beginning to accelerate and should continue to do so throughout 2018 and into 2019.
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 Wage Growth increased 0.8% from last quarter to a new very strong 4.2%. Holiday sales surged 5.9% in 2017, the best season since 2005. E-commerce sales have continued to surge at the expense of brick and mortar stores. With the Unemployment Rate at a historically low 4.1%, wages are on the rise and inflation is finally starting to show some life.
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. Overall, Wholesale Trade continues to improve year-over-year, up 7.6% in 2017. US Wholesale Trade is growing at an accelerating rate for both Durable and non-durable Goods.
Key areas experiencing strength continues to be the Commodities sector and the Construction sector. The US Dollar made a feeble attempt at rising during the quarter but, in the end, ended the quarter where it started. A weak US Dollar makes US goods less expensive overseas and therefore helps support exports.
We continue to expect accelerating growth in both durable and non-durable segments through the end of 2018.
Manufacturing – Sunny. Manufacturing continues to chug along but now at an accelerating pace. Manufacturing Production is up 2.4% through December with foreign demand supporting domestic manufacturing, which is up 6.2% year-over-year. Construction Machinery is up a significant 14.5% from a year ago.
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.
As we predicted last quarter, Manufacturing has turned the corner and is now in growth mode.
Interest Rates – Partly Sunny. The U.S. economy is fundamentally sound. However, the inflation rate continues to defy expectations. As of the end of 2017, the inflation was 2.1%, fractionally higher than the Fed’s target of 2%.
Even though borrowing costs are rising and consumer wage growth is beginning to accelerate, we continue to believe interest rates will remain low for longer. The Fed will raise rates, but they will be increase by only 0.25% each time.
A key unknown is how the Fed will begin unwinding the $4.5 trillion of bonds it holds on its’ balance sheet due its’ intervention in the markets during the Great Recession.
Capital Goods New Orders – Partly Sunny. Capital Goods New Orders are in an accelerating growth trend as firms begin to increase their investment in capital goods. Non-defense orders rose to $765.7 billion, up 3.6% from year ago levels.
As noted previously, increasing industrial activity is lifting demand for Capital Goods. Buoyed by rising US Corporate Profits, businesses are better positioned to place new orders in 2018.
We anticipate this metric will continue to improve through the end of 2018.
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. Building Permits are up 2.7%, Housing Starts are up 2.4%, and Housing Completions are up 8.7% from year ago levels.
Non-Residential Construction is expanding as well. Warehouse Building Construction is up 36.4% and Multi Retail Construction is up 16.2%
However, 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 – 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, annual economic growth was stronger than that of the US in the 4th quarter and is the best in over a decade. UK Consumer Price Index was up 3% while Retail Sales was up 1.4% year-over-year.
In the Asia/Pacific region, China’s GDP was up 6.8% year-over-year showing remarkable stability and Japan had stronger than expected growth the second half of 2017.
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 5% on stronger than expected growth in Euro and Asia emerging economics.
Overall, the global economic recovery is on track. 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.