Economic Commentary | First Quarter 2017
The markets performed well for the three months ending March 31, 2017: the large cap S&P 500 index increased 6.1%, the mid/small cap Russell 2000 index gained 2.5%, and the international MSCI EAFE index rose by 7.2%. These gains reflect a broadly improved US economy, as evidenced by the strength of the labor market, growing consumer and investor confidence, further recovery in the housing market, and booming service and manufacturing sectors.
February’s jobs report ~ issued in early March ~ marked the 77th straight month of payroll gains, towering over the prior record of 48 months during the late 80s. During the first quarter, the US economy gained a healthy 210K jobs per month while wages advanced higher, both of which put additional money into the pockets of consumers.
As a result, consumers were feeling more hopeful about their economic prospects as we began 2017, with the Consumer Confidence index surging to a 17-year high. Small businesses, too, were more optimistic, with the NFIB Small Business Optimism Index near its highest reading in 43 years.
The general trend of recovery in housing continues unabated, though we have seen a fair amount of volatility in the month-to-month reports. Housing prices continue to accelerate while an important measure of homebuilder sentiment hit a 12-year high in March.
The Institute of Supply Management’s twin reports on the US manufacturing and service sectors gained momentum throughout the quarter and are both well into expansion territory. In fact, the results reported at the end of the quarter marked the 86th straight month of expansion for the service side of our economy and the 93rd straight month of expansion for manufacturing.
Now that the labor market has reached what many consider “full employment,” the Federal Reserve’s attention is keenly on inflation, as pricing pressures are just beginning to build. The Fed raised rates in December 2016 and again in March 2017. There is some debate about whether there will be two or three more rate hikes in 2017, though futures markets seem to be pricing in just two more. Either way, it is apparent that the Fed is committed to a path to normalized interest rates. In fact, Janet Yellen has stated that she anticipates that the Fed Funds rate will rise to 3.0% by the end of 2019.
The Trump administration has not had the smoothest of transitions to power, with political infighting, allegations of Russian election meddling, North Korean missile launches, and strained encounters with world leaders. Despite this rocky start, investors have been willing to give the new administration the benefit of the doubt on its pro-business policy promises. After surging on Trump’s election victory, markets have settled into a more circumspect view of our president’s ability to quickly effect new reforms on tax policy, reducing regulations, implementing an infrastructure spending package, and replacing the Affordable Care Act with a new healthcare law.
The dollar began the quarter at its highest level in 14 years on the strength of the US economy. Despite the lofty level of the dollar relative to our major trading partners, US exports rose to their highest levels in more than 18 months as shipments of American technology products hit record levels. This was a welcome development to those who feared the strong dollar would crimp the ability of the US to sell its goods abroad.
Though production cuts made by both OPEC and non-OPEC members caused oil prices to rise by over 11% during the last quarter of 2016, US increases in production along with fears of a modest slowdown in China this year caused oil prices to fall by 5.8% during the quarter. Closing the quarter at $50.60/barrel, oil remains at a price that significantly benefits the consumer.
While China continues to successfully execute its grand economic reforms, growth has remained a strong 6.7% per year. The government has targeted growth for 2017 at 6.5%, which will keep it in line to meet its 10-year goal of doubling GDP between 2010 and 2020. As we have mentioned in our recent commentary, a stabilized China is a powerful engine for the global economy. What remains to be seen is whether tensions over trade and North Korea’s missile testing will lead to a weaker or stronger relationship between the US and China. We are certainly hoping for the latter!
Europe’s recovery continues unimpeded despite a number of challenges to the region’s economy. At the end of March, Prime Minister Theresa May invoked Article 50 of the Lisbon Treaty to formally initiate Brexit, a move that comes with enormous uncertainty about the UK’s ability to successfully negotiate trading relationships with the remaining members of the eurozone. In addition, certain economies within the region continue to struggle with the hangover of the European financial crisis, including Italy, Spain, and Greece. That said, eurozone unemployment hit an 8-year low during the quarter, with the unemployment rate falling to 9.5%.