Economic Outlook – October 2017

October 6, 2017 Economic Outlook
  1. GDP growth has been fairly robust. According to the Commerce Department, the economy grew at the fastest rate in two years during the second quarter when the GDP growth rate increased to +3.1%. The Atlanta Fed GDPNow model forecast third quarter growth would be even higher. The model forecast is real-time, updating to reflect each major economic release. Initially, the GDPNow predicted a +4.0% year-over-year GDP growth rate. Downward revisions to the forecast in subsequent weeks reflected hurricane-impacted data. As a result, we expect moderate growth in the third and fourth quarter driven by replacement vehicles, rebuilding and storm clean-up somewhat offset by higher gas prices and muted wage growth. We forecast GDP growth of +2.2% in 2017 versus +1.5% last year.

  2. The Consumer Price Index (CPI) is expected to increase +2.1% this year compared to +1.3% last year. Core CPI is a measure of inflation which excludes highly volatile energy and food prices creating a more stable index and easier comparisons. Core CPI posted a stronger than expected increase of +0.2% in August. Strength in shelter costs (+0.12%) and a firming in goods prices (+0.11%) followed five months of weak readings. The Federal Reserve’s preferred inflation gauge, Core PCE (Personal Consumption Expenditures) Price Index, rose +0.1% during the month of August. The lower PCE report hints at lower rates for longer.

  3. Headline August retail sales were down -0.2% month-over-month, below consensus expectations for a +0.2% rise, and worse than July’s downwardly revised +0.3% increase; July’s initial reading was +0.6%. The August decline was the most in six months led lower by weak auto sales. Core retail sales, a component of GDP, also declined -0.2% month-over-month versus expectations for a +0.2% rise. Much of this weakness is associated with disruptions caused by Hurricanes Harvey and Irma. Looking ahead, some retailers may be challenged during the all-important holiday season as higher gasoline prices, and replacement purchases resulting from the storms, erode consumers’ ability to spend on discretionary items.

  4. U.S. hourly wage growth recently slowed to just +2.5% annually. As a result, the personal savings rate declined to +3.5% from +5.1% a year earlier. The personal savings rate is after-tax income that wasn’t spent. Consumers will eventually require support from higher wages to fuel spending growth. In an encouraging sign, the Fed lowered 2018 and 2019 unemployment expectations from +4.2% to +4.1%. These rates are well-below the NAIRU (Non-Accelerating Inflation Rate of Unemployment) estimate of +4.6%, indicating a tightening labor market which should place upward pressure on wage inflation. According to certain economic models, labor trends could push Core PCE inflation to the Fed’s 2% target by 2019. We believe recent soft wage growth is temporary and reflation is likely over the next few years.

Sources: Bloomberg LLC, FactSet, U.S. Department of Labor

* 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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