Half Time for the Economy 2017
The better than expected June jobs report and Federal Reserve Chair Janet Yellen’s upcoming Congressional testimony is a good opportunity to review where the U.S. economy stands at the mid point of 2017. Economic Growth: The broadest measure of economic growth is Gross Domestic Product (GDP). Over the past fifty years or so, the economy has grown by 3 percent annually. In the past decade, that rate has dropped to about 2 percent, with 2015 being the best year (+2.6 percent) and 2009 the worst year (-2.8 percent).
In 2017, we only have official data for Q1 (+1.4 percent), but Q2 should show improvement, leaving us at the same ol’ 2 percent-ish GDP for the first half of the year. That said, the current expansion, which has now entered its 97th month, is the third longest in US history, according to the National Bureau of Economic Research. (The longest was the tech boom, which lasted 120 months from 1991 to 2001 and at number two, was the boom of the 1960’s (1961-1969), which lasted for 106 months.)
Labor Market: The economy added 222,000 non-farm payrolls in June, above the consensus forecast of 180,000 and the two previous months were revised higher. The result put average monthly job creation in 2017 at 180,000, down from the more than 200,000 per month in 2014, 2015 and 2016. But this far into the labor market recovery, which did not turn positive until 2010, most economists expect employment gains to slow down.
The unemployment rate, which fell to a 16-year low of 4.3 percent in May, edged up to 4.4 percent in June, still well below the Fed’s estimate of the “natural rate” (the expected rate over the next 5 years, in the absence of shocks to the economy) of 4.7 percent. Because the labor force has been expanding by just 100,000 per month, even small employment gains could push down the unemployment rate further, according to analysts at Capital Economics.
Meanwhile, wages remain stubbornly low, with annual gains of just 2.5 percent in June, which is where we have been for the past year. Even with low inflation,“Worker spending power is growing by less than 1 percent, which makes it hard for people to spend a lot more money,” says economist Joel Naroff.
Federal Reserve: In 2017, the Fed has raised short-term interest twice, each time by a quarter of a percent. In minutes from the most recent meeting, the central bankers seem more concerned about normalizing interest rates than muted inflation, which officials see as a temporary phase. Most economists believe that the Fed will raise rates one more time this year, either in September or December, but as always, the decision will be “data dependent”.
The focus for the remainder of the year will likely be how the Fed unwinds large portions of its balance sheet. As a reminder, during the financial crisis, the central bank stepped in and purchased government and mortgage-backed securities to provide liquidity and to keep interest rates low. Over the past decade, the Fed’s total assets have grown from $870 billion in August 2007 to $4.4 trillion today. The manner in which the Fed shrinks those holdings could have a big impact on financial markets.
Housing: “My kingdom for a house!” The biggest hurdle for the housing market in 2017 is low inventory, which is why housing starts, permits, new home construction and pending home sales have all slowed down this spring. “Ten years ago, the problem in the housing market was lack of buyers,” according to NAR chief economist Lawrence Yun. “Today, the problem is lack of sellers. Inventory levels are near historic lows. Consequently, prices are running up too high. Over the past five years, prices have increased by 40 percent, while people’s incomes have only grown by 10 percent. That’s unsustainable, choking off affordability.”
Ever since the housing crash, builders have been cautious, putting up high-priced custom homes that deliver a solid and reliable profit. They’ve shied away from building cheaper homes on spec in new developments aimed at first-time buyers. But with pent-up demand rising, mortgage rates still low and the economy on track to continue growing, that may start to change.
Stocks: Forget potential tax cuts, infrastructure spending and regulatory reform…robust corporate profits drove indexes higher in the first six months of the year. From January through June, the S&P 500 and the Dow Jones Industrial Average were up 8 percent (its best first half since 2013) and the NASDAQ was ahead by 14 percent (its best first half since 2009).