Economic Outlook – July 2018

July 10, 2018 Economic Outlook
  1. The latest estimate for U.S. GDP growth in the first quarter is 2.0%. While this represents a decline from the 2.9% growth rate for the fourth quarter of 2017, it is the highest Q1 growth rate since 2015. Preliminary readings on consumer spending, business equipment investments, and industrial production, along with the stimulative effect of President Trump’s tax cuts, point towards strong growth in the second quarter. We believe that second quarter GDP growth could be 4.0% or higher.

  2. The U.S. labor market is strong. The current unemployment rate is 3.8%, the lowest level since the 1990’s internet boom. There are now 1.1 job openings for every job seeker. This is the first time that there have been more jobs than workers to fill them since the Bureau of Labor Statistics began tracking this data in 2001. We don’t think the unemployment rate has troughed, and believe the healthy labor market will continue to drive strong growth in GDP and corporate earnings.

  3. The Federal Reserve hiked its target for the Federal Funds Rate to a range of 1.75-2.00% percent at its June 13th meeting, and expects to make two more quarter point rate hikes by the end of 2018. However, the possibility of an inverted yield curve, which occurs when short rates exceed long rates and has historically predicted recessions, may keep the Fed from raising rates that quickly. The current yield on the 2 Year Treasury Note is 2.53% vs. 2.84% for the 10 Year Treasury Bond. We expect the Fed to continue raising its target rate into 2019.

  4. Trade-related posturing between the U.S. and China intensified during June. President Trump said that tariffs on $34 billion of Chinese goods will take effect on July 6, with tariffs on another $16 billion to follow soon. China promised to respond with tariffs on $50 billion of U.S. goods if the U.S. tariffs are passed. Trump subsequently threatened to impose tariffs on up to $400 billion of Chinese goods if China follows through with its $50 billion tariff threat. China’s leadership said they would respond to this larger round of tariffs by imposing tariffs on all U.S. exports to China ($167 billion annually) and by taking other actions such as cancelling orders from U.S. firms and making it harder for U.S. firms to obtain licenses to operate in China. We regard a trade war as the greatest threat to the current economic expansion.

Sources: Bloomberg LLC, FactSetU.S. Commerce DepartmentBloomberg Businessweek, IHS iSuppli

Disclosure: This commentary reflects the opinions of Welch & Forbes based on information that we believe to be reliable. It is intended for informational purposes only, and not to suggest any specific performance or results, nor should it be considered investment, financial, tax or other professional advice. It is not an offer or solicitation.


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