Note: This post is an excerpt from Gould Asset Management’s Economic and Market Review for the Third Quarter of 2018. The excerpt is posted here for the benefit of our blog subscribers.
US Economy Surges Ahead Despite Lackluster Housing Market
US GDP soared at an annualized rate of 4.2% in the second quarter, its fastest pace in nearly four years. Consumer spending, the largest component of GDP, was boosted by this year’s $1.5 trillion tax cut. Third quarter growth is expected to subside somewhat.
Job growth was not as robust as expected in September, but the headline unemployment rate dropped to 3.7%, reflecting a drop in the number of people actively looking for jobs. There is steady–but not accelerating–upward pressure on wages, as businesses scramble to fill positions.
Consumer confidence for September spiked to 138.4, an 18-year high, and is nearing the all-time high of 144.7 set during the dot-com bonanza of 2000.
The housing market remains a weak spot in the otherwise booming domestic economy. Home sales are flat to down and price growth is the slowest it’s been in a year. Mortgage rates creeping towards 5% are hurting housing affordability.
Steady as She Goes, Fed Hikes Again
To no one’s surprise, the Federal Reserve increased its benchmark federal-funds rate by 0.25%, as the US economy remains on solid footing on most fronts.
New economic projections paint a slightly brighter picture, with the Fed expecting higher GDP growth in 2018 and 2019. There was little mention of trade tariffs, as policy makers have yet to see meaningful negative effects in the data.
Fed officials expect to increase interest rates once more this year, likely in December, three more times next year, and once in 2020, suggesting the current rate increase cycle could end in approximately two years.
Europe Posts Middling Results, Japan Rebounds
The Eurozone economy grew 0.4% over the second quarter and 2.1% year-over-year, helped by a surge in fixed capital investments. On the downside, consumer spending softened and for the second quarter in a row, net exports had negative effect on GDP.
The European Central Bank (ECB) reaffirmed that it has no plans to begin raising interest rates in the near-term. Brexit, rising trade frictions, and emerging markets weakness all pose risks to growth in the region. However, ECB President Draghi downplayed some of these challenges, reiterating that recent data still suggests a broad-based expansion and a recovery in inflation.
Growth in Japan bounced back, advancing 0.7% in the quarter after beginning the year in a contraction. Consumer spending picked up significantly, while net exports also increased relative to the previous quarter. Like the ECB, Japanese central bank officials also see global trade tensions as a potential downside risk to growth.
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