Note: This post is an excerpt from Gould Asset Management’s Economic and Market Review for the Third Quarter of 2016. The excerpt is posted here for the benefit of our blog subscribers.
US Economy Maintains Steady Course
The US remained on steady footing, though a string of mixed data revealed both strengths and weaknesses in different segments of the economy.
New revisions show GDP climbed a modest 1.4% annualized in Q2, driven by growing exports and expanded business investing. Early estimates place Q3 GDP gains at roughly 2.5%—a welcome boost if they pan out.
Household spending made a decent, if not dazzling, showing, increasing at an annualized rate of 2.7% this quarter despite a flat August. This marked a dip from last quarter’s powerful upswing, however, when consumption surged 4.3% annualized. Meanwhile, consumer confidence continues its steady rise. More Americans say it’s become easier to find jobs, and a widening number report improving incomes.
The economy continued to add jobs at a healthy clip. Employers created 151,000 new positions in August and 156,000 in September—lower than projected, but still in line with an encouraging trend that saw July add 255,000 to payrolls. Jobless claims dipped to a new post-recession low, reflecting minimal layoffs and a sturdy labor market.
Sales of new homes accelerated strongly while existing home sales stagnated, making for an unbalanced quarter for housing. Manufacturing also struggled with uneven results. In August the ISM manufacturing index slipped to 49.4, but quickly bounced back to 51.5 in September, reviving the momentum that manufacturers enjoyed earlier this year.
The U.S. presidential race entered its endgame.In a campaign marked by unusually high volatility in poll results, Clinton has established a strong edge over Trump as of mid-October. Markets may turn increasing focus over the next three weeks to House and Senate outcomes, with implications for tax policy.
Fed Defers Rate Increase Once More
The Fed elected not to raise short-term interest rates for yet another quarter. In recent statements, officials noted positive trends like robust household spending and sustained gains in jobs and income. Yet they still want more progress on key goals including upward inflation and wage pressures, both of which have lingered below Fed targets.
Most Fed officials and outside observers still forecast a rate hike before year’s end. Any 2016 rate increase would probably come in December, as policymakers usually avoid major moves shortly prior to the November election.
Eurozone Shows Resilience in Wake of Brexit
The euro bloc managed to sustain its delicate recovery despite fears of a blow from Brexit. Unemployment stayed flat at about 10% throughout July and August—hardly ideal, but still a welcome drop from its peak of 12% in 2013. Meanwhile, GDP moved up a middling 1.6% year-over-year.
Britain rebounded partially in the months following the EU vote. Consumer confidence sprung back to pre-referendum levels in September, while service and manufacturing indexes enjoyed a strong August recovery.
But new Prime Minister Theresa May unsettled markets by announcing her government would initiate the exit process no later than March 2017. The accelerated timeline—along with May’s apparent rejection of a ‘Norway model’ that would preserve Britain’s unfettered access to the EU common market—sent the pound slumping to a 31-year low against the dollar, as investors grow anxious over prospects for a ‘hard Brexit’ that imposes greater trade and immigration barriers between Britain and the continent.
The European Central Bank left its monetary policy unchanged. Mario Draghi and colleagues received some good news on inflation when prices rose 0.4% in September, the fastest climb in nearly two years (relieving deflation fears). Even so, the number remains well below the long-stated target of 2%.
The Bank of Japan (BOJ) announced its intention to keep yields on 10-year Japanese government bonds pegged at 0%. The BOJ also committed not to raise interest rates even if inflation exceeds its official 2% goal, marking the first time a central bank has promised to maintain accommodative policies even during robust inflation.
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