U.S. Economic Data Suggest Continued Growth in 2017
Since the election, the media has focused on our new President. The potential boost to economic growth of a pro-growth policy agenda centered on tax cuts and fiscal stimulus has helped propel equity markets to new highs. In our opinion, the improvement in economic activity that started well before the election has played an equally important role.
Upcoming policy changes present some opportunities; a corporate tax cut is a good example. There are also risks, such as stressed international relations. We suggest rather than focus on the “what ifs” of the new administration, investors focus on the economic fundamentals that support healthy corporate earnings growth. The data continue to support the view that the economic expansion is set to continue in 2017.
The labor market has continued its steady pace of improvement. The U.S. reached full employment levels in late 2015 with the unemployment rate falling to 5% and stood at 4.8% in January 2017. Total nonfarm payroll employment increased by 227,000 jobs in January, a 1.6% annual growth rate, and has averaged close to 200,000 monthly additions for the last year. New claims for unemployment benefits have dropped to 40 year lows. Against that backdrop, we see wage growth as the key driver to future spending and it looks encouraging. Atlanta Fed data (shown in Figure 1) indicate wage growth is increasing and trending towards 4% annual growth. Past cycle peaks were materially higher, implying there is still room to run. Forward indicators, including small business surveys, point to growth accelerating over the next 12 to 18 months.
Early in 2016, there were signs of a “manufacturing recession.” Industrial production was declining, particularly in areas reliant on energy production and mining. The Purchasing Managers’ Index (a key indicator of the economic health of the manufacturing sector) signaled contraction for five straight months. Those weak trends reversed, with expansion readings since March 2016 and show recent signs of future strength. Manufacturing orders registered a new high in January with a fifth consecutive month of growth. Regional surveys of manufacturing activity typically lead the national data. Results just out from the Philly Fed point toward continued growth in the year to come (see Figure 2).
Surveyed small businesses and individual consumers appear very optimistic about the future. Both the University of Michigan Consumer Confidence and the National Federation of Independent Businesses (NFIB) surveys have dramatically improved in the last several months. This data augers well for prospects in retail spending and business investment.
U.S. GDP growth accelerated over the last three quarters and was 1.9% during the fourth quarter of 2016. Trade data was a headwind to growth, but domestic demand showed solid strength with final sales to domestic purchases increasing by 2.5%. This is a good sign for a consumer driven economy where household purchases represent 70% of economic activity.
What’s it all mean?
Economic growth helps drive corporate profits and higher profits propel stock prices long term. The decisions made in Washington will play a heavy role in markets this year. The uncertainty surrounding these changes and the response of our trading partners present both opportunities and risks for markets. However, absent major policy errors from the administration, we are encouraged that the economy is set to grow this year. We also acknowledge many clients remain concerned about the impact of the President’s actions. It is important to remember that the strength of the U.S. economic system has proven resilient to many threats over the years, including political concerns. Short term volatility can be expected, but long term we believe any challenges can be overcome. Betting against America has been a poor wager over time. Our approach is to stay disciplined, stick to long term allocations, and buy excellent companies at discounted prices.
Market Commentary Disclaimer: This publication is for informational purposes only and should not be considered investment advice or a recommendation of any particular security, strategy or investment product. The information contained herein is the opinion of Boston Financial Management and is subject to change at any time based upon unforeseen events or market conditions.