2017 Third Quarter Economic Review

Authored by Joseph C. Ford, Chief Economist

The U.S. economy grew at a somewhat faster pace than previously estimated in the second quarter recording its fastest rate since the first quarter of 2015.  The Commerce Department indicated GDP increased at a 3.1% annual rate in the April-June period.  With the GDP acceleration in the second quarter, the economy grew 2.1% in the first half of 2017.  The boost to growth came primarily from stronger than expected consumer spending, which is the largest contributor to the economy.  Estimates for the growth rate in the July-September period are about 2.25% considering the impact from Hurricanes Harvey and Irma.  The impact from these storms may cut into third quarter growth, but the rebuilding from the storms are expected to boost GDP growth in the fourth quarter and in early 2018.

The U.S. economy continues to exhibit signs of stable underlying growth.  The monthly index of leading economic indicators has shown increases in 87 of the last 99 readings.  The economic expansion that began in July 2009 is in its ninth year as the third longest growth run in U.S. history.  Despite its longevity, the current expansion has been lackluster with GDP growth averaging just 2.1% annualized.

Payrolls have averaged gains of 150,000 monthly for the first nine months of this year.  The last two months of the quarter were impacted negatively by Hurricanes Harvey and Irma.  We expect improvement in the monthly numbers as the return to more normalized weather conditions improve job growth in both the fourth quarter of 2017 and the first quarter of 2018.  We continue to expect job growth for all of 2017 of approximately 2,000,000.

Outside of consumer spending, other drivers to growth were oil exports and auto purchases.  U.S. crude exports are blasting through records partially helped by the flood of exports after the two recent hurricanes.  The export rate is more than twice as high as it was a month ago.  Oil will likely continue to flow from the U.S. at higher rates as long as U.S. producers keep pumping.  After record years in both 2015 and 2016 for U.S. light truck and car sales, they continue at a reasonable pace in 2017 at about a 15 million annualized rate.

Global growth forecasts grew slightly more optimistic over the last three months.  Roughly 75% of the world’s economy is sharing in a broader recovery than any in a decade.  Inflation remains muted in much of the advanced economies and wage growth is weak.  The chief risk to this scenario is an abrupt rise in long-term U.S. interest rates.

As we have noted previously, the U.S. economy continues to be in a modest expansion relative to the recession that preceded it.  There are no shortages of domestic or international geopolitical shocks that could pose risks for the U.S. economy or markets.  U.S. markets and our economy could be challenged generally for short periods of time should incidents occur.

The S&P 500 has risen for eight consecutive quarters.  Equity market returns were solid during the year’s first nine months as measured by a 14.2% return for the S&P 500.  Smaller capitalization stocks as measured by the Russell 2000 returned 10.9%.  We continue to forecast an investment environment with stocks providing returns that mimic earnings growth and outperforming bonds in 2017.