Overview of the U.S. Economy

According to the third estimate released by the Bureau of Economic Analysis (BEA), the U.S. economy grew in the fourth quarter of 2017, with real gross domestic product (GDP) increasing at an annual rate of 2.9%, following a third quarter increase of 3.2%.  The increase in real GDP in the fourth quarter reflected positive contributions from personal consumption expenditures, nonresidential fixed investment, exports, residential fixed investment, state and local government spending, and federal government spending that were partly offset by a negative contribution from private inventory investment. 

Forecasters surveyed by the Federal Reserve Bank of Philadelphia predicted, on average, a 3.0% annual real growth rate for the first quarter of 2018 and 2.9% for the second quarter of 2018.  The forecasters predicted, on average, that real GDP will grow 2.8% in 2018, 2.5% in 2019, 2.0% in 2020, and 1.7% in 2021.  The forecasts for 2018, 2019, and 2020 are higher than previous estimates for the same periods.

Employment

Nonfarm payroll employment, according to the Bureau of Labor Statistics (BLS), rose by 313,000 in February 2018.  The unemployment rate in February 2018 was 4.1%.  The BLS reported job gains in construction, retail trade, professional and business services, manufacturing, financial activities, and mining.

Forecasters surveyed by the Federal Reserve Bank of Philadelphia predicted, on average, that the unemployment rate will be 4.0% in 2018, 3.8% in 2019, 3.9% in 2020, and 4.0% in 2021.

Inflation

According to the BLS, inflation, as measured by changes in the Consumer Price Index for All Urban Consumers (CPI-U), increased 0.2% in February 2018 on a seasonally adjusted basis.  Over the previous 12 months, the all items index increased 2.2% before seasonal adjustment.  The index for all items less food and energy rose 1.8% for the twelve-month period ending January 2018.  The energy index rose 7.7% over the last year, while the food index increased 1.4%. Forecasters surveyed by the Federal Reserve Bank of Philadelphia predicted, on average, inflation is expected to be 2.1% in 2018, 2.2% in 2019, and 2.3% in 2020.  Over the next ten years, forecasters expect CPI inflation to average 2.25% annually.

Interest Rates

The interest rate on the three-month Treasury bill increased from 0.75% as of March 31, 2017 to 1.70% as of March 31, 2018. The interest rate on the ten-year Treasury note increased from 2.40% as of March 31, 2017 to 2.74% as of March 31, 2018.

As of March 31, 2018, the yields on Moody’s Aaa-rated corporate bonds and Baa-rated corporate bonds were 3.77% and 4.59%, respectively.

Yield Curve

The spread between the thirty-year and the one-year treasury bills declined from 1.99% as of March 31, 2017 to 0.88% as of March 31, 2018.

Corporate Profits

According to the BEA, profits from current production (corporate profits with inventory valuation and capital consumption adjustments) decreased $1.1 billion in the fourth quarter over the third, in contrast to an increase of $90.2 billion in the third quarter over the second quarter.

Stock Markets

The S&P 500 Total Return Index opened at 4,086.29 on March 31, 2017 and closed higher at 4,630.64 on March 31, 2018.  This corresponds to an annual return of 13.3%.  The NASDAQ Composite Total Return Index opened at 6,741.02 on March 31, 2017 and closed higher at 8,140.57 on March 31, 2018. This corresponds to an annual return of 20.8%.  The Dow Jones Industrial Average Total Return Index opened at 43,779.79 on March 31, 2017 and closed higher at 52,270.30 on March 31, 2018.  This corresponds to an annual return of 19.4%.  In the graph below, the March 31, 2017 values were set to 100.

Consumer Confidence

The Conference Board reported that the Consumer Confidence Index decreased in March 2018 to 127.7, down from 130.0 in February 2018.The index is based on a survey of consumer perceptions of present economic conditions and expectations of future conditions.  The survey is based on a representative sample of 5,000 U.S. households and is considered a leading indicator of future consumer expenditures and economic activity.

The University of Michigan Survey of Consumers reported that the Index of Consumer Sentiment increased in March 2018 to 101.4, up from 99.7 in February 2018 and 96.9 in March 2017. The index is based on a survey of consumer perceptions of present economic conditions and expectations of future conditions.  The survey is based on a sample of 500 phone interviews consisting of 50 core questions are conducted across the continental U.S.  This is considered a leading indicator of future consumer expenditures and economic activity.

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