Economic Outlook - February 2017
- U.S. Gross Domestic Product (GDP) grew at an annual rate of 1.9% in the fourth quarter (Q4) of 2016. The reading trailed estimates for 2.2% growth and followed a 3.5% increase in GDP in the third quarter. For all of 2016, GDP growth was 1.6% as the second half strength made up for a weak first half of the year. Important contributors to Q4 GDP growth were a 2.5% increase in personal consumption, driven by durable goods, and business inventories. The foreign trade deficit expanded in Q4 and net exports were the largest detractor from growth in the period.
- The U.S. economy has been stuck in slow growth mode since the Great Recession of 2008 – 2009. Many economists believe that more modest GDP growth is a structural issue resulting from factors such as slower population growth, a decline in the workforce due to baby boomer retirements and muted workforce productivity gains. Newly inaugurated President Donald Trump, however, has pledged to accelerate growth for the U.S. economy to 4% through a combination of fiscal stimulus, lower tax rates and less regulation. If President Trump’s initiatives are successful, however, the impact on growth would not likely be felt until the second half of 2017 and into 2018. We forecast U.S. GDP growth in 2017 of 2.5-3.0%.
- The Federal Open Market Committee (FOMC) left its target for short term interest rates unchanged after its January 31-February 1 meeting. The range remains 0.5% – 0.75%. The FOMC also did not make any substantive changes to their current assessment or outlook. They continue to expect to increase their rate target by 0.25% three times in 2017 in a gradual fashion. Investor expectations for the number and timing of potential increases in rates, though, can be viewed in the federal funds interest futures market. Currently, the market is expecting only two 0.25% increases in rates in 2017 with probabilities pointing to those occurring at the Fed’s June and September meetings. The FOMC next meets on March 14-15 and market expectations for the probability of a rate increase at that meeting are less than 10%.
- The January unemployment report showed the U.S. economy added 227,000 jobs during the month. The number was better than expected and brought the three month average up to 183,000 which is in-line with the pace of job creation in 2016. The unemployment rate rose from 4.7% to 4.8%, but it was for the good reason that more people were trying to enter the workforce. Hourly earnings grew 2.5% year over year which continues the trend of higher wages from earlier in 2016 although the January numbers represented a downtick from December’s 2.9% growth. Other metrics such as a relatively short work week and an elevated number of part time workers indicate slack remains in the employment environment. While any one month’s unemployment report does not make a trend, the report was viewed as helpful in not forcing the Fed’s hand to raise rates sooner than expected.
* 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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