Economic Outlook - September 2016
- Federal Reserve Chair Janet Yellen gave a sanguine view of the economy at the FOMC’s annual Jackson Hole Economic Policy Symposium on August 26. In the anticipated speech, Yellen stated the US economy is “now nearing the Federal Reserve’s statutory goals of maximum employment and price stability.” The Fed believes its dual mandate of stable growth and full employment may be within reach. As the economy gains momentum, the Fed is expected to gradually raise the Federal Funds rate in an effort to maintain economic stability.
- Jobs were added at a faster rate than anticipated in July. Payroll gains of 275,000 outpaced the six-month average and beat expectations. More individuals who had previously quit looking for employment entered the workforce causing the unemployment rate to remain unchanged at 4.9%, while increasing the labor participation rate. In August, the jobless rate and labor participation rate held steady though just 151,000 jobs were added. Strength in employment supports the thesis that the U.S. economy continues to gain momentum. The Atlanta Fed’s GDPNow forecast for third quarter GDP growth of 3.2% reflects acceleration from 1.2% in the second quarter.
- The consensus year-over-year increase in the Consumer Price Index (CPI) for the first quarter of next year is 2.2%; the headline Personal Consumption Expenditures (PCE) deflator is estimated to advance nearly 1.9%. This jump in headline inflation is recognized by the Fed and could be one reason why they have signaled the need to raise the inflation target – or allow the “economy to run hot” with inflation above its target. Rising inflation expectations would likely push the 10-year Treasury yield higher.
- Productivity gains have not materialized, leading some to question the sustainability of GDP growth. Nonfarm business productivity – the goods and services produced each hour by workers, recently declined at a 0.5% annual seasonally adjusted rate. The decrease occurred in the second quarter and reflects a slowing from the tepid rate of 1.3% from 2007 through 2015 – itself just half the pace seen in 2000 through 2007. The decline may reflect difficulty in gauging productivity in the service sector which has been growing as a percent of GDP. Also, during an expansion, productivity initially declines as businesses add employees.
- The U.K. economy has shown remarkable resilience since the British vote on June 23 to exit the Eurozone. A weaker British pound has buoyed tourism while the UK manufacturing orders survey for August reached the highest level in two years. Elsewhere, the Eurozone composite PMI ticked up in August.
Sources: Bloomberg LLC, Thompson Financial, U.S. Commerce Department, IHS iSuppli
* 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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