Coming Into View

Upcoming data reports will help to fill in the near-term picture of the economy, while developments in Washington will lead to a reassessment of the intermediate outlook.

As the first quarter of 2017 comes to a close, we have an incomplete picture of the economy. However, we’ll get some fresh information in the next two weeks that will allow us to get a more accurate reading. Note that the advance estimate of 1Q17 GDP growth isn’t due until April 28.

Consumer spending accounts for nearly 70% of GDP. February figures will arrive on Friday. Retail sales were reported to have risen modestly in February. However, the 1Q17 spending total is likely to be moderately strong, but slower than in 4Q16. Job and wage growth has been supportive, but gasoline prices have risen over the last year. While nominal average hourly earnings rose 2.8% year-over-year, but 0.0% after adjusting for inflation. In addition to reduced purchasing power, the household sector has also experienced delayed tax refunds, higher rents, and a reset of health insurance deductibles. As it is, February is a transitional month for the household sector. Many will pay down debt incurred during the holiday shopping season. Weather and seasonal adjustment can also distort the picture. Still, the fundamentals remain sound. Job data over the next few months will be an important gauge.

Business fixed investment appears to be trending at a moderately strong level. Orders and shipments of capital goods are trending higher, although orders may not be as robust as was hoped for earlier. Last year’s bottoming in energy exploration has had a positive impact. Job losses from the energy contraction were severe in some areas of the country, but small on a national level. The bigger impact was on business investment. There’s a lot of capital equipment in energy exploration. The contraction had a big impact on business fixed investment and, in turn, GDP growth. There is an interesting aspect to the energy recovery. Technology changes have led to fewer jobs being added. One technician can monitor and adjust multiple rigs. This is expected to be a theme in much of the goods-producing sector. Those hoping that manufacturing jobs will return are almost certain to be disappointed.

Foreign trade has been an important component of U.S. growth and a possible misstep remains one of the biggest risks going forward. At the recent meeting of G-20 central bankers and finance ministers, the U.S. pressured to remove language from the communiqué indicating that countries would resist protectionist efforts. Needless to say, this is not encouraging. Trump administration officials are reported to be divided sharply on foreign trade policy. The Wall Street types understand the importance of global trade and finance. The populists buy into the anti-trade rhetoric. Peter Navarro, who (despite having a Harvard Ph.D.) has been widely criticized for not understanding the elementary basics of foreign trade, is reported to have the president’s ear. Disagreements are not unusual in the early months of a new administration, but the trade policy outlook remains very uncertain and that uncertainty could end up being a negative for the economy.