Note: This post is an excerpt from Gould Asset Management’s Economic and Market Review for the First Quarter of 2017. The excerpt is posted here for the benefit of our blog subscribers.
US Enters 2017 on Positive Note
Overall, the US produced encouraging results throughout the first quarter, indicative of an economy that has made great strides since the depths of the recession. Yet some cautionary readings also appeared, reflecting the need for vigilance in the months ahead.
Multiple measures indicate the US is nearing full employment. The jobless rate fell to 4.5% in March, its lowest figure in almost a decade. The number of discouraged and underemployed jobseekers has dropped to post-recession lows as well, indicating many Americans are finding it easier to land full-time work.
Average hourly earnings rose 2.7% over the past year, part of a slow but building growth in wages. A tightening labor market has made it tougher for employers to secure qualified workers. This trend, in turn, could create upward pressure on salaries, as organizations look for incentives to entice strong applicants.
GDP expanded by a healthy 2.1% in the final quarter of 2016, according to the latest estimates. However, current projections place Q1 expansion at just 0.9%, and the figure is unlikely to top 1.5%, even following upward revisions.
Consumer confidence spiked to a 16-year high, part of a surge in overall sentiment following November’s election. Yet puzzlingly, household spending declined over the past two quarters. With consumption fueling nearly 70% of GDP, any persistent weakness here could create headwinds for the economy as a whole.
Trump took steps toward realizing his reformist vision on trade, ordering officials to scrutinize existing trade deals in an effort to reduce the trade deficit. However, talk of an all-out trade war with nations like China may be premature. President Trump currently seems hesitant to carry out some of his more aggressive campaign promises, like his pledge to impose a 45% tariff on Chinese imports.
Fed Conveys Confidence with Rate Hike
The Federal Reserve boosted short-term interest rates once more in March, a decision that demonstrates confidence in the country’s overall economic outlook. Among other things, Fed officials have been heartened by ongoing progress in areas like employment and wage growth. Meanwhile, inflation keeps inching closer toward the Fed’s 2% target, offering further rationale for tightened rates.
Most observers project two more rate hikes in 2017. Predicting their timing may pose a challenge, however, due to uncertainty around the Trump administration’s evolving economic agenda. In particular, the Fed will want to see if Trump manages to enact major stimulus measures before it commits to future action.
In another sign of optimism, top officials have begun examining ways to reduce the Fed’s investment in US securities like Treasury bonds, a move that would help trim the central bank’s $4.5 trillion balance sheet. Such a shift would be consistent with rising interest rates, as both policies are intended to lower the US’s money supply and prevent a growing economy from overheating. However, no formal decision has yet been reached.
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