Economic Outlook - May 2017
- The U.S. Department of Commerce reported a lower than expected first quarter real gross domestic product (GDP) annual growth rate of 0.7% in its advanced estimate, the lowest in three years. Economists had expected a growth rate of 1.0% according to Bloomberg. The growth rate was dragged down by excess inventories and net imports. Auto sales were also weak, falling in each of the quarter’s three months. The GDP estimate will be revised at least once in the coming months. Weak economic growth has not been atypical in the first quarter since the end of the Great Recession, a phenomenon in part ascribed to seasonal adjustment factors. We expect GDP to accelerate in subsequent quarters. Even Federal Reserve Chairperson Janet Yellen described the weak print as “transitory.”
- The Eurozone, the single currency bloc of 19 European countries, grew 0.5% in the first quarter or at an annual rate of 2.0% as reported by statistics agency Eurostat. There was concern entering 2017 that a rise in populism translating into electoral victories across the region would slow economic growth. To date, elections in Austria, the Netherlands, and France where the populist failed to win, reduces the likelihood that future elections in France and Germany will pose a drag on eurozone economies.
- We expect the Federal Reserve, this month, to maintain a current target range for federal funds of 0.75% – 1% which it established at its March meeting. According to Bloomberg the probability of a May rate hike is only 13%. We expect to see two more interest rate hikes this year as the Fed aims for a gradual normalization of monetary policy with the next hike expected to come in June (70% probability according to Bloomberg). However, we believe the Fed is still data dependent and will look for stronger economic data over the next month before committing to another interest rate raise.
- President Trump concluded his first 100 days in office without achieving any significant legislation to his credit. Last month President Trump decided to reconsider legislation pertaining to the Affordable Care Act, after initially abandoning the effort when the House of Representatives couldn’t muster enough votes. The President also unveiled a tax overhaul plan which was heavy on tax cuts but light on details. The market, unsurprisingly, didn’t react because of skepticism that the plan in its current form can pass in Congress. At least some of the post-election stock market rally was due to expectations of an economic stimulus inducing tax plan, so passage in some form continues to be part of the favorable stock market outlook.
Sources: Federal Reserve, Bloomberg LLC, FACTSET, National Association of Realtors, U.S. Department of Labor, Conference Board, Energy Information Administration
* This commentary reflects the opinions of Welch & Forbes based on information that we believe to be reliable. It is intended for informational purposes only, and not to suggest any specific performance or results, nor should it be considered investment, financial, tax or other professional advice. It is not an offer or solicitation.
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