Please find below our mid-year economic review authored by our Chief Economist, Joe Ford. We hope that this information is beneficial to you.
The final revision to GDP growth for the January 1 – March 31 quarter resulted in the U.S. economy growing at a 1.4% annualized rate. Lackluster business spending on structures and a reduction in consumer spending weighed on the quarter. The prospects for the second quarter look solid with growth returning to levels around 2.5-3.0%. Consumers look to become less cautious in their spending habits due to lower gas prices, low interest rates, and income growth. This should lead to a pickup in consumer spending which is expected to generate stronger overall growth.
The U.S. economy continues to exhibit signs of stable underlying growth. The monthly index of leading economic indicators has shown increases in 84 of the last 96 readings. The economic expansion that began in July 2009 is set to enter its ninth year as the third longest growth run in U.S. history. Only the expansions of the 1960s and 1990s were longer. Despite its longevity, the current expansion has been lackluster with GDP growth averaging just 2.1% per year. This is weaker than any other recovery since at least 1949.
Through the first six months, payroll gains averaged 180,000 monthly slightly below the monthly average for all of 2016. Continuing at the same pace for the remainder of 2017 would result in annual job growth in 2017 at 2.1-2.2 million new jobs. Although we have occasionally seen good professional job growth, a concern in this employment recovery continues to be the overall quality of the jobs created during this expansion.
U.S. car and light truck sales continue at a very respectable pace in 2017 after another record year in 2016. Cheaper gasoline, low interest rates, employment gains, and income growth continue to drive sales. U.S. crude oil production, at 9.5 million barrels per day, has been a positive driver to growth as well.
As we have noted previously, the U.S. economy continues to be in a modest expansion relative to the recession that preceded it. Geopolitical events can pose potential risks for the U.S. economy. We continue to have no shortage of these as we enter into the second half of 2017. Terrorist attacks in France, Belgium, Germany, London, and Saudi Arabia among others have occurred during this year and appear to be spreading. Both the U.S. markets and economy could be challenged for short periods of time if an escalating incident occurs. Continued unforeseen domestic terrorism along with the lead up to the administration’s rollout of economic impetus plans could also pose short-term volatility and risks.
The S&P 500 has risen for seven consecutive quarters. Equity market returns were solid during the year’s first half as measured by a 9.34% return for the S&P 500. Smaller capitalization stocks as measured by the Russell 2000 returned 4.90%. Bonds provided positive returns in a range of 1-3% in the short to intermediate space. We continue to expect an investment environment of a mid single digit return landscape with stocks providing returns that mimic earnings growth and for the calendar year stocks outperforming bonds.