by The Gould Asset Management Team

Note: This post is an excerpt from Gould Asset Management’s Economic and Market Review for the Third Quarter of 2017. The excerpt is posted here for the benefit of our blog subscribers.

US Economy Marches Forward at Measured Pace; Hurricanes’ Impact Felt

Q2 GDP rebounded after a relatively weak first quarter. Second quarter readings came in at a 3.1% annualized rate, driven by strong consumer spending. Although Hurricanes Harvey and Irma will impact third quarter growth, reconstruction activity and federal hurricane relief efforts should help boost the economy next quarter.

Showing its first signs of life in several months, core inflation ticked up 0.2% in August, which may soothe some concerns of a broad slowing. It will take more readings, however, to determine if the pickup can be sustained.

Consumer confidence fell in the wake of the Texas and Florida hurricanes, but remained relatively high at 119.8 in September. The labor market was a bright spot, with fewer saying jobs are hard to get.

The headline unemployment rate fell to 4.2% in September despite the first decline in nonfarm payrolls in seven years, a dip largely attributed to hurricane effects. Wage growth, which had been stagnant much of this year, spiked 0.5% last month, another sign of a tightening job market.

The housing sector had trouble building momentum going into year-end, and Harvey and Irma dampened the outlook further. Going into the fourth quarter, it seems unlikely housing will be a significant near-term contributor to economic growth.

In early September, Congress reached a deal to raise the debt ceiling and extend government funding for three months. Next on the agenda is a tax reform bill; passage is highly uncertain, and views on its likely economic impact vary widely.

The Fed Releases its Bond Tapering Schedule

The third quarter ended with the Fed leaving interest rates unchanged. Meanwhile, after months of speculation, the Fed formally announced its plan to shrink its $4.5 trillion balance sheet.

Starting in October, the central bank will begin reducing its bond holdings by up to $10 billion per month initially, growing to $50 billion per month over time.

These are big numbers, for sure, but actually represent a fairly gradual unwinding of the so-called Quantitative Easing (QE) program. At $50 billion per month, it would take more than 7 years for the bank to fully unload its holdings.

Policy makers hope that the market impact of unwinding QE will be minimal. QE sought to keep interest rates low, so its unwinding could ultimately put upward pressure on interest rates. However, its gradual nature, combined with soft inflation expectations and quantitative easing abroad, mean rate levels could remain low for some time to come.

The latest Fed forecasts still suggest one more rate hike this year, most likely to occur at December’s meeting. Despite inflation consistently undershooting the Fed’s target (a situation Fed Chair Janet Yellen calls an economic “mystery”), policy makers believe the economy remains on solid ground.

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