I previously mentioned that the best way to analyze the U.S. economy was to look specifically at each category that comprises our gross domestic product (GDP.)
Consumer spending: Consumer spending growth requires two things: the ability to spend, which comes from jobs and wages, and the willingness to do so, which depends on confidence.
The number of jobs has continued to grow, albeit at a slowing rate. Although the decay in the job growth rate raises concerns about the future, based on historical trends, growth should continue through 2017. A growing number of employed people will enable spending to grow faster.
Beyond the number of people employed, wage growth also contributes to the ability to spend more. As the labor market tightens, wage growth should remain at current levels of between 2.5 percent and 3 percent, or it could increase.
Overall, labor income growth, which includes both job growth and wage growth, has remained around 4 percent on a nominal basis, indicating that the ability to grow spending is there.
The second part of the equation—the willingness to spend—depends on consumer confidence, which is doing even better than income growth. Confidence has risen to levels last seen in 2001, and although it has pulled back a bit from the peak, it remains at levels that historically have led to faster spending growth.
Business Investment: Business investment had been a weak spot, but that started to change in early 2017. After languishing in negative territory in 2016, private investment growth has bounced back, in some cases, to levels not seen since before the financial crisis.
Government spending: What business gives, however, government is likely to take away. After supporting the economy in 2016, all levels of government have actually decreased spending in 2017. Although the decreases are small, the transformation of government from an economic tailwind to a headwind will hurt growth in 2017 as a whole. In fact, this was a major reason for the first-quarter slowdown. The decline is particularly damaging given expectations at the beginning of the year for fiscal stimulus, which has not happened.
Exports and imports: Exports and imports continue to expand. Over the past several years, imports have grown faster than exports, subtracting from economic growth. The most recent data, however, shows changes in trade in rough balance, taking this sector back to net zero from a negative in the second half of 2016. This should also help maintain economic growth.
Interest rate policy driven by stability
The Fed is now saying—more clearly than in years past—that the risks of not raising rates are greater than those of raising them. So, expect continued slow increases, to 1.50–1.75 percent by the end of the year. Also, expect the Fed to start rolling off its asset base, not by selling but by lowering the reinvestment rate. Markets now largely expect continued policy tightening, so absent any surprises, the impact should be minimal, as it has been so far.
Financial markets supported by revenue and earnings growth
A growing economy and a normalization of monetary policy mean global stock markets are likely to continue to trade on fundamentals, such as revenue and earnings growth. Here in the U.S., both revenue and earnings growth were greater than expected at the start of the year, a trend that should continue through 2017. Revenue growth, in particular, has been strong, at levels last seen in the immediate recovery from the financial crisis. Strong revenue growth should also support growth in earnings, with the rest of 2017 expected to be quite strong.
All of these areas are still not without their risks. Whether it is data-driven, political or geo-political there are a number of items that I believe should be observed with a watchful eye and will be discussing soon.