2018 3Q Economic Capital Market Outlook

Economic Outlook

The domestic economy is functioning as well as any period since 2007, however we expect economic growth to slow next year. Measured by GDP, we expect the economy grew by a solid 4.0% in the second quarter and is growing at a rate of 2.7% with most sectors performing well. There are significant issues that are helping to spur continued economic growth including the follow through effects of recent tax cuts on consumption, the impact of repatriated cash on business investment, and the improved labor market.

One of the pillars to sustained economic growth is a strong labor market, and we are in the midst of a very healthy jobs market with the U.S. economy producing over 200 thousand jobs per month. Jobless claims measured by the Labor Department are at their lowest level since 1969 and we have seen a slight improvement in the labor force participation rate as more workers come back to the labor force. However, we have not seen a meaningful increase in productivity. Increases in productivity lead wage inflation which is one of the reasons we have yet to experience a meaningful increase in wage rates.

The rate of inflation is trending closer to the Fed’s 2% target. The price index for the personal consumption expenditures increased at a 2.7% pace in the first quarter. We expect to see some noise in the inflation data over the next quarter as trade tariffs impact prices.

The current economic expansion, which began in 2009, is now the second longest expansion on record. It appears we are in the sweet spot for the U.S. economy; however, cross winds are beginning to mitigate future growth prospects. The coordinated global economic recovery is weakening as Europe, Japan and China economic growth slows. Trade tariffs, acting much like taxes, will dampen domestic growth, disrupt supply chains and pressure prices of goods higher. As a result, we expect companies will make capital decisions that support the stability of their supply chains. Recently, Tesla announced that they will build a factory in China rather than deal with U.S. tariffs on exports. Similarly, Harley Davidson announced it will move production to Europe rather than deal with tariffs.