Tag: gdp

U.S. Economic Report – September 30, 2019

During the second quarter of 2019, the U.S. economy grew at an annual rate of 2.0% over the prior quarter.  Household spending has been a primary driver of growth, and the economy continues to perform strongly despite slowing global growth and headwinds from trade disputes.

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 second quarter of 2019, with real gross domestic product (GDP) increasing at an annual rate of 2.0%, following a first quarter increase of 3.1%.  The increase in real GDP in the second quarter reflected positive contributions from PCE, federal government spending, and state and local government spending that were partly offset by the negative effects from private inventory investment, exports, nonresidential fixed investment, and residential fixed investment [1].  This brings the US economy its twenty-first consecutive quarter with positive GDP growth.  For comparison, the longest streak of consecutive quarters is thirty-nine, which occurred between 1991 and 2001.

Forecasters surveyed by the Federal Reserve Bank of Philadelphia predicted, on average, a 1.8% annual real growth rate for the third quarter of 2019 and 2.0% for the fourth quarter of 2019.  The forecasters predicted, on average, that real GDP will grow 2.3% in 2019, 1.9% in 2020, 2.0% in 2021, and 2.1% in 2022.  The forecast for 2021 was higher than previous estimates, while the forecasts for 2019, 2020, and 2022 were revised downward from previous estimates [2].

Population

Population growth is an important driver of long-term growth in an economy.  The total population increased from 327.7 million in August 2018 to 329.7 million in August 2019 [3].  The working age population (15-64) declined slightly from 206.6 million in August 2018 to 206.2 million in August 2019 [4].

The labor force participation rate has hardly budged in recent years and remains lower than pre-2008 levels.  In August 2019, the civilian labor force participation rate was 63.2% [5].  The minimum participation rate in the past decade was 62.4%, recorded in September 2015, while the maximum of 66.4% was recorded in December 2006.  This is at least partially explained by the aging population but could be evidence of slack in the labor market.

Employment

Nonfarm payroll employment, according to the Bureau of Labor Statistics (BLS), rose by 130,000 in August 2019.  The unemployment rate (U3) in August 2019 remained at 3.7%.  This is at the bottom end of the Federal Open Market Committee (FOMC) participants’ projections of the long-run natural rate of unemployment, which range from 3.6% to 4.5%.  The BLS reported job gains in federal government, health care, and financial activities [6].

Forecasters surveyed by the Federal Reserve Bank of Philadelphia predicted, on average, that the unemployment rate will be 3.7% in 2019, 3.6% in 2020, 3.9% in 2021, and 4.0% in 2022 [7].

The U6 unemployment rate, which includes all marginally attached workers and those employed part-time for economic reasons, declined from 7.4% in August 2018 to 7.2% in August 2019 [8].  The gap between U3 and U6 has declined from the 10-year high of 7.4% in September 2011 to 3.5% in August 2019.

The average number of weeks unemployed has declined to near pre-2008 levels and has decreased over the past twelve months, from 22.6 weeks in August 2018 to 22.1 in August 2019 [9].  This is far below the 10-year high of 40.7 weeks in July 2011 and slightly above the low of 16.5 weeks in March 2008.  The number of jobless claims increased slightly, from 214,750 in August 2018 to 215,600 in August 2019 [10].

Inflation

According to the BLS, the Consumer Price Index for All Urban Consumers (CPI-U) increased 0.1% in August 2019 on a seasonally adjusted basis.  Over the previous 12 months, the all-items index increased 1.7% before seasonal adjustment [11].  The index for all items less food and energy rose 2.4% for the twelve-month period ending August 2019.  The energy index fell 4.4% over the last year, while the food index increased 1.7%.  The price pressures measure estimates the probability that the personal consumption expenditures price index inflation rate will exceed 2.5% over the next twelve months.  This price pressures measure reported a probability of 2.2% in August 2019, which is below the average of 8.2% over the past two years [12].

Forecasters surveyed by the Federal Reserve Bank of Philadelphia predicted, on average, headline CPI inflation to be 1.9% in 2019, 2.0% in 2020, and 2.2% in 2021.  Over the next ten years, forecasters expect CPI inflation to average 2.20% annually [13].

Interest Rates

The interest rate on the three-month Treasury bill decreased from 2.15% as of September 28, 2018 to 1.84% as of September 30, 2019 [14].  The interest rate on the ten-year Treasury note decreased from 3.05% to 1.68% over the same period [15].

On September 18, 2019, the Federal Open Market Committee (FOMC) announced their decision to lower the federal funds target range to 1.75 – 2.00%.  The following charts display projections from FOMC participants of the midpoint of the federal funds target range at the end of each calendar year [16].

The following table represents the market’s reactions leading up to and following the FOMC meeting.

As of September 30, 2019, the yields on Moody’s Aaa-rated corporate bonds and Baa-rated corporate bonds were 3.01% and 3.88%, respectively [17].

The spread between the twenty-year Treasury Bond and the one-year Treasury Bill declined from 0.54% as of September 28, 2018 to 0.19% as of September 30, 2019 [18].  A combination of increasing short-term interest rates from federal funds rate hikes and tempered long-term growth expectations have caused the yield curve to flatten in recent years [19].  The spread between long- and short-maturity Treasury securities have long been used as a predictive measure for future economic performance.  A recent paper from the Federal Reserve showed that the probability of a near-term recession has increased in recent years.  However, when additional information was incorporated into their model, such as the excess bond premium, the component of corporate bond spreads in excess of an estimate of the compensation for expected default losses, the recession probability was significantly lower [20].

Corporate Profits

According to the BEA, profits from current production (corporate profits with inventory valuation and capital consumption adjustments) increased $75.8 billion in the first quarter of 2019 over the first quarter, compared to a decrease of $78.7 billion in the first quarter of 2019 over the fourth quarter of 2018 [21].

Stock Markets

The S&P 500 Total Return Index closed at 5,144.1 on September 28, 2018 and closed higher at 5,330.3 on September 30, 2019.  This corresponds to an annual return of 3.6%.  The Dow Jones Industrial Average Total Return Index closed at 58,028.5 on September 28, 2018 and closed higher at 60,471.5 on September 30, 2019.  This corresponds to an annual return of 4.2%.  The NASDAQ Composite Total Return Index closed at 9,322.1 on September 28, 2018 and closed higher at 9,370.9 on September 30, 2019 [22, 23].  This corresponds to an annual return of 0.5%.  In the graph below, the September 28, 2018 values were set to 100. 

Construction & Housing Starts

Construction spending and housing starts are two other important indicators for the economy.  Construction spending may indicate the sentiment in real estate markets and the soundness of the economy while housing starts are an alternative indicator of consumer sentiment.  Increases in demand for newly constructed homes can lead to job growth in the construction industry, increased demand for appliances and furniture, and ripple effects throughout the economy.  Housing starts increased from 1.279 million units in August 2018 to 1.364 million units in August 2019 [24].  Construction spending, a seasonally adjusted annual figure, decreased from $1.312 trillion in August 2018 to $1.287 trillion in August 2019 [25].

Consumer Confidence

The Conference Board reported that the Consumer Confidence Index declined in September 2019 to 125.1 from 134.2 in August [26].  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 decreased in August 2019 to 89.8, down from 98.4 in July 2019 and 96.2 in August 2018 [27].  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 conducted across the continental U.S.  This is considered a leading indicator of future consumer expenditures and economic activity.

In September, the survey focused on the variation in consumer sentiment based on political party affiliation.  The survey results are presented in the following table.

Conclusion

In conclusion, the economy performed well in the second quarter of 2019; however, it has shown signs of slowing down.  Economic growth has slowed, and many economists have revised growth expectations downward.  The yield curve remains inverted, with the 10-year Treasury bond falling below the 3-month Treasury bill.  Every recession since the 1960s has been preceded by an inversion of the Treasury yield curve.  Inflation has been modest, and the labor market remains tight with the unemployment rate hovering around the FOMC participants’ projection of the natural rate of unemployment.  Equity markets have rebounded from a dip at the beginning of August 2019.  Consumer sentiment remains optimistic with a wide divergence based on the individual’s political party.

Federal Reserve Chairman Jerome Powell recounted his thoughts on the economy’s performance at post-meeting press conference on September 18, 2019:

The U.S. economy has continued to perform well.  We are into the 11th year of this economic expansion, and the baseline outlook remains favorable. The economy grew at a 2½ percent pace in the first half of the year.  Household spending—supported by a strong job market, rising incomes, and solid consumer confidence—has been the key driver of growth.  In contrast, business investment and exports have weakened amid falling manufacturing output.  The main reasons appear to be slower growth abroad and trade policy developments—two sources of uncertainty that we’ve been monitoring all year.

The following table displays a summary of the economic indicators, their performance over the past year, and whether this is viewed as a positive or negative sign for the economy at large.  The leading, lagging, and coincident indices were obtained from The Conference Board and were measured as of August 2019 [28].

[1]      U.S. Department of Commerce, Bureau of Economic Analysis, Gross Domestic Product: Second Quarter 2019 (Third Estimate), September 26, 2019

[2]      Federal Reserve Bank of Philadelphia, Third Quarter 2019 Survey of Professional Forecasters, August 9, 2019

[3]      U.S. Bureau of Economic Analysis, Population [POPTHM], retrieved from FRED, Federal Reserve Bank of St. Louis, October 10, 2019

[4]      Organization for Economic Co-operation and Development, Working Age Population: Aged 15-64: All Persons for the United States [LFWA64TTUSM647N], retrieved from FRED, Federal Reserve Bank of St. Louis, October 10, 2019

[5]      U.S. Bureau of Labor Statistics, Civilian Labor Force Participation Rate [CIVPART], retrieved from FRED, Federal Reserve Bank of St. Louis, October 10, 2019

[6]      United States Department of Labor, Bureau of Labor Statistics, The Employment Situation: August 2019, September 6, 2019

[7]      Federal Reserve Bank of Philadelphia, Third Quarter 2019 Survey of Professional Forecasters, August 9, 2019

[8]      U.S. Bureau of Labor Statistics, Total unemployed, plus all marginally attached workers plus total employed part time for economic reasons [U6RATE], Civilian Unemployment Rate [UNRATE], retrieved from FRED, Federal Reserve Bank of St. Louis, last accessed October 10, 2019

[9]      U.S. Bureau of Labor Statistics, Average (Mean) Duration of Unemployment [UEMPMEAN], retrieved from FRED, Federal Reserve Bank of St. Louis, October 10, 2019

[10]      U.S. Employment and Training Administration, Initial Claims [ICSA], retrieved from FRED, Federal Reserve Bank of St. Louis, October 10, 2019

[11]      United States Department of Labor, Bureau of Labor Statistics, Consumer Price Index: August 2019, September 12, 2019

[12]      Federal Reserve Bank of St. Louis, Price Pressures Measure [STLPPM], retrieved from FRED, Federal Reserve Bank of St. Louis, October 10, 2019

[13]      Federal Reserve Bank of Philadelphia, Third Quarter 2019 Survey of Professional Forecasters, August 9, 2019

[14]      Board of Governors Federal Reserve System, 3-Month Treasury Bill: Secondary Market Rate [DTB3MS], retrieved from FRED, Federal Reserve Bank of St. Louis, last accessed October 10, 2019

[15]      Board of Governors Federal Reserve System, 10-Year Treasury Constant Maturity Rate [DGS10], retrieved from FRED, Federal Reserve Bank of St. Louis, last accessed October 10, 2019

[16]      Federal Open Market Committee, Summary of Economic Projections, September 18, 2019

[17]      Moody’s, Moody’s Seasoned Aaa Corporate Bond Yield© [DAAA], Moody’s Seasoned Baa Corporate Bond Yield© [DBAA], retrieved from FRED, Federal Reserve Bank of St. Louis, last accessed October 10, 2019

[18]      U.S. Department of the Treasury, Daily Treasury Yield Curve Rates, last accessed October 10, 2019

[19]      Johansson, Peter, and Andrew Meldrum (2018). “Predicting Recession Probabilities Using the Slope of the Yield Curve,” FEDS Notes. Washington: Board of Governors of the Federal Reserve System, March 1, 2018, https://doi.org/10.17016/2380-7172.2146.

[20]      Gilchrist, S., and E. Zakrajšek (2012), “Credit Spreads and Business Cycle Fluctuations,” American Economic Review 102(4), pp. 1692-1720.

[21]      U.S. Department of Commerce, Bureau of Economic Analysis, Corporate Profits: Second Quarter 2019, September 26, 2019

[22]      Total return indices include returns from both income and capital gains

[23]       S&P Capital IQ Database, last accessed October 10, 2019

[24]      U.S. Census Bureau and U.S. Department of Housing and Urban Development, Housing Starts, New Privately-Owned Housing Units Started [HOUST], retrieved from FRED, Federal Reserve Bank of St. Louis, last accessed October 10, 2019

[25]      U.S. Census Bureau, Total Construction Spending, Seasonally Adjusted Annual Rate [TTLCONS], retrieved from FRED, Federal Reserve Bank of St. Louis, last accessed October 10, 2019

[26]      The Conference Board, Consumer Confidence Index, September 24, 2019

[27]      University of Michigan, Surveys of Consumers, September 2019

[28]      The Conference Board, The Conference Board Leading Economic Index® (LEI) for the U.S. Remained Unchanged in August, September 19, 2019

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U.S. Economic Report – December 31, 2018

Economic Overview Fourth Quarter 2018

During the third quarter of 2018, the U.S. economy grew at 3.4% over the prior quarter.  Despite recent turmoil in equities markets, economic indicators point toward continued economic growth.

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 third quarter of 2018, with real gross domestic product (GDP) increasing at an annual rate of 3.4%, following a second quarter 2018 increase of 4.2%.  The increase in real GDP in the first quarter reflected positive contributions from PCE, private inventory investment, nonresidential fixed investment, federal government spending, and state and local government spending that were partly offset by the negative effects from exports and residential fixed investment.¹ This brings the US economy its eighteenth consecutive quarter with positive GDP growth.  For comparison, the longest streak of consecutive quarters is thirty-nine, which occurred between 1991 and 2001. Economic Overview Fourth Quarter 2018.

Forecasters surveyed by the Federal Reserve Bank of Philadelphia predicted, on average, a 2.6% annual real growth rate for the fourth quarter of 2018 and 2.4% for the first quarter of 2019.  The forecasters predicted, on average, that real GDP will grow 2.9% in 2018, 2.7% in 2019, 2.1% in 2020, and 1.7% in 2021.  The forecasts for 2018, 2020, and 2021 are higher than previous estimates, while the forecast for 2019 is lower than previous estimates for the same periods.²

Population

Population growth is an important driver of long-term growth in an economy.  The total population increased from 326.9 million in November 2017 to 329.2 million in November 2018.³  The working age population (15-64) increased from 205.8 million in November 2017 to 206.8 million in November 2018.⁴

The labor force participation rate has hardly budged in recent years and remains lower than pre-2008 levels.  In November 2018, the civilian labor force participation rate was 62.9%.⁵   The minimum participation rate in the past decade was 62.3%, recorded in September 2015, while the maximum of 66.4% was recorded in December 2006.  This is at least partially explained by the aging population but could be evidence of slack in the labor force.

Employment

Nonfarm payroll employment, according to the Bureau of Labor Statistics (BLS), rose by 155,000 in November 2018.  The unemployment rate (U3) in November 2018 was unchanged at 3.7%.  The BLS reported job gains in health care, manufacturing, and transportation and warehousing.⁶ This is slightly below the Federal Open Market Committee (FOMC) participants’ projections of the long-run natural rate of unemployment, which have a range of 4.0 to 4.6%.

Forecasters surveyed by the Federal Reserve Bank of Philadelphia predicted, on average, that the unemployment rate will be 3.9% in 2018, 3.7% in 2019, 3.8% in 2020, and 4.0% in 2021.⁷

The U6 unemployment rate, which includes all marginally attached workers and those employed part-time for economic reasons, has declined from 8.0% in November 2017 to 7.6% in November 2018.  The gap between U3 and U6 has declined from the 10-year high of 7.4% in September 2011 to 3.9% in November 2018.

The average number of weeks unemployed has declined to near pre-2008 levels, to 21.7 weeks in November 2018, from 25.2 in November 2017.  This is far below the 10-year high of 40.7 weeks in July 2011, and slightly above the 16.5 weeks in March 2008.  The number of jobless claims has also been declining.  For the week ending December 22, the number of seasonally adjusted jobless claims was 216,000, while for the prior year that number was 242,000.⁸

Inflation

According to the BLS, inflation, as measured by changes in the Consumer Price Index for All Urban Consumers (CPI-U), was unchanged in November 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 2.2% for the twelve-month period ending November 2018.  The energy index rose 3.1% over the last year, while the food index increased 1.4%.⁹  The price pressures measures the probability that the personal consumption expenditures price index inflation rate will exceed 2.5% over the next twelve months.  This price pressures measure reported a probability of 4.9% in December 2018, which is reasonably low relative to the past five years.¹⁰

Forecasters surveyed by the Federal Reserve Bank of Philadelphia predicted, on average, headline CPI inflation to be 2.4% in 2018, 2.3% in 2019, and 2.3% in 2020.  Over the next ten years, forecasters expect CPI inflation to average 2.21% annually.¹¹

Interest Rates

The interest rate on the three-month Treasury bill increased from 1.42% as of January 2, 2018 to 2.40% as of December 31, 2018.¹²  The interest rate on the ten-year Treasury note increased from 2.46% to 2.69% over the same period.¹³

On December 19, 2018 the FOMC announced their decision to increase the federal funds target range from 2.0 – 2.25% to 2.25 – 2.5%.  This increase was anticipated, and the FOMC’s added the following sentence to their official statement:

The Committee judges that risks to the economic outlook are roughly balanced, but will continue to monitor global economic and financial developments and assess their implications for the economic outlook.¹⁴

The following charts display projections from FOMC participants of the midpoint of the federal funds target range at the end of each calendar ear, as well as the implied probabilities of the federal funds rate path from federal funds rate futures markets. ^15, 16  Most FOMC participants have revised their forecast of the federal funds rate from three rate hikes in 2019 down to two.

The following table below represents the market’s reaction during the lead up to and following the FOMC meeting.

As of December 31, 2018, the yields on Moody’s Aaa-rated corporate bonds and Baa-rated corporate bonds were 3.99% and 5.14%, respectively.¹⁷

The spread between the twenty-year and the one-year treasury bills declined from 0.82% as of December 29, 2017 to 0.24% as of December 31, 2018.¹⁸  A combination of increasing short-term interest rates from federal funds rate hikes and tempered long-term growth expectations have caused the yield curve to flatten in recent years.  The spread between long- and short-maturity Treasury securities have long been used as a predictive measure for future economic performance.  A recent paper from the Federal Reserve showed that the probability of a near-term recession has increased in recent years.¹⁹  However, when additional information was incorporated into their model, such as the excess bond premium,²⁰ the component of corporate bond spreads in excess of an estimate of the compensation for expected default losses, the recession probability was significantly lower.

Corporate Profits

According to the BEA, profits from current production (corporate profits with inventory valuation and capital consumption adjustments) increased $78.2 billion in the third quarter of 2018 over the second, compared to an increase of $65.0 billion in the second quarter of 2018 over the first.²¹

Stock Markets

The S&P 500 Total Return²² Index closed at 4,672.65 on December 29, 2017 and closed lower at 4,441.63 on December 31, 2018.  This corresponds to an annual return of negative 4.9%.  The Dow Jones Industrial Average Total Return Index closed at 53,317.96 on December 29, 2017 and closed lower at 51,462.77 on September 30, 2018.  This corresponds to an annual return of negative 3.5%.  The NASDAQ Composite Total Return Index closed at 7,935.29 on December 29, 2017 and closed lower at 7,709.91 on December 31, 2018.²³  This corresponds to an annual return of negative 2.8%.  In the graph below, the December 29, 2017 values were set to 100.  Each of these indices were near their all-time highs in September.

Construction & Housing Starts

Construction spending and housing starts are two other important indicators for the economy.  Construction spending may indicate the sentiment in real estate markets and the soundness of the economy, while housing starts are an alternative indicator of consumer sentiment.  Increases in demand for newly-constructed homes can lead to job growth in the construction industry, increased demand for appliances and furniture, and can have a ripple effect throughout the economy.  Housing starts decreased from 1,265 thousand units in October 2017 to 1,217 thousand units in October 2018.²⁴  Construction spending, a seasonally adjusted annual rate, increased from $1,247,531 million in October 2017 to $1,308,848 million in October 2018.²⁵

Consumer Confidence

The Conference Board reported that the Consumer Confidence Index decreased in December 2018 to 128.1, down from 136.4 in November 2018.²⁶ 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 December 2018 to 98.3, up from 97.5 in November 2018 and 95.9 in December 2017.²⁷  However, this is lower than the 10-year high in March 2018 of 101.4.  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.

According to Surveys of Consumers chief economist, Richard Curtin, consumers reported more negative than positive news regarding job prospects for the first time in two years.  It is possible that the recent stock market performance influenced the results of recent months and remains to be seen if this is indicative of a long-term trend.

Conclusion

In conclusion, the economy continued to perform well in the third quarter of 2018, which bodes well for the fourth.  Economic growth continued to exceed expectations, inflation has been modest while unemployment remains low, hovering around FOMC participants’ projections of the natural rate of unemployment.  Equities markets, however, have experienced volatility in recent months, erasing the gains seen over the course of 2018.  Consumer and investor sentiment remain optimistic, despite a recent downward tick.  Threats to the economy include potential ramifications from rising tariffs, the impact of the Federal Reserve’s decision to increase the federal funds rate, and a ripple effect from the declines in the stock market.

Federal Reserve Chairman Jerome Powell recounted his thoughts on the economy’s performance at post-meeting press conference on December 19, 2018:

Since September, the U.S. economy has continued to perform well, roughly in line with our expectations.  The economy has been adding jobs at a pace that will continue bringing the unemployment rate down over time. Wages have moved up for workers across a wide range of occupations—a welcome development.  Inflation has remained low and stable and is ending the year a bit more subdued than most had expected.  Although some American families and communities continue to struggle, and some longer-term economic problems remain, the strong economy is benefiting many Americans.

The following table displays a summary of the economic indicators, their performance over the past year, and whether this is viewed as a positive or negative sign for the economy at large.  The leading, lagging, and coincident indices were obtained from The Conference Board.

[1] U.S. Department of Commerce, Bureau of Economic Analysis, Gross Domestic Product: Third Quarter 2018 (Third Estimate), December 21, 2018

[2] Federal Reserve Bank of Philadelphia, Third Quarter 2018 Survey of Professional Forecasters, August 10, 2018

[3] U.S. Bureau of Economic Analysis, Population [POPTHM], retrieved from FRED, Federal Reserve Bank of St. Louis, January 2, 2018

[4] Organization for Economic Co-operation and Development, Working Age Population: Aged 15-64: All Persons for the United States [LFWA64TTUSM647N], retrieved from FRED, Federal Reserve Bank of St. Louis, January 2, 2018

[5] U.S. Bureau of Labor Statistics, Civilian Labor Force Participation Rate [CIVPART], retrieved from FRED, Federal Reserve Bank of St. Louis

[6] United States Department of Labor, Bureau of Labor Statistics, The Employment Situation: November 2018, December 7, 2018

[7] Federal Reserve Bank of Philadelphia, Fourth Quarter 2018 Survey of Professional Forecasters, November 13, 2018

[8] United States Department of Labor, Bureau of Labor Statistics, Unemployment Insurance Weekly Claims, December 27, 2018

[9] United States Department of Labor, Bureau of Labor Statistics, Consumer Price Index: November 2018, December 12, 2018

[10] Federal Reserve Bank of St. Louis, Federal Reserve Economic Data, Series: STLPPM, Price Pressures Measure, last accessed January 3, 2019

[11] Federal Reserve Bank of Philadelphia, Fourth Quarter 2018 Survey of Professional Forecasters, November 13, 2018

[12] Federal Reserve Bank of St. Louis, Federal Reserve Economic Data, Series: DTB3MS, 3-Month Treasury Bill: Secondary Market Rate, last accessed January 3, 2019

[13] Federal Reserve Bank of St. Louis, Federal Reserve Economic Data, Series: DGS10, 10-Year Treasury Constant Maturity Rate, last accessed January 3, 2019

[14] Wall Street Journal, Fed Statement Tracker, https://projects.wsj.com/fed-statement-tracker-embed/

[15] Federal Open Market Committee, Summary of Economic Projections, December 19, 2018

[16] Federal Reserve Bank of Atlanta, Market Probability Tracker, last accessed January 3, 2019

[17] Federal Reserve Bank of St. Louis, Federal Reserve Economic Data, Series: DAAA, Moody’s Seasoned Aaa Corporate Bond Yield©, Series: DBAA, Moody’s Seasoned Baa Corporate Bond Yield©, last accessed January 3, 2018

[18] U.S. Department of the Treasury, Daily Treasury Yield Curve Rates, last accessed January 3, 2018

[19] Johansson, Peter, and Andrew Meldrum (2018). “Predicting Recession Probabilities Using the Slope of the Yield Curve,” FEDS Notes. Washington: Board of Governors of the Federal Reserve System, March 1, 2018, https://doi.org/10.17016/2380-7172.2146.

[20] Gilchrist, S., and E. Zakrajšek (2012), “Credit Spreads and Business Cycle Fluctuations,” American Economic Review 102(4), pp. 1692-1720.

[21] U.S. Department of Commerce, Bureau of Economic Analysis, Corporate Profits: Third Quarter 2018, December 21, 2018

[22] Total return indices include returns from both income and capital gains

[23] S&P Capital IQ Database, last accessed January 3, 2019

[24] Federal Reserve Bank of St. Louis, Federal Reserve Economic Data, Series: HOUST, Housing Starts, last accessed January 3, 2019

[25] Federal Reserve Bank of St. Louis, Federal Reserve Economic Data, Series: TTLCONS, Total Construction Spending, Seasonally Adjusted Annual Rate, last accessed January 3, 2019

[26] The Conference Board, Consumer Confidence Index, December 27, 2018

[27] University of Michigan, Surveys of Consumers, December 2018

[28] The Conference Board, The Conference Board Leading Economic Index® (LEI) for the U.S. Increased Slightly in November, December 20, 2018

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U.S. Economic Report – September 30, 2018

Economic Overview – Third Quarter 2018

During the second quarter of 2018, the U.S. economy grew at a feverish 4.2% over the prior quarter. Economic indicators point toward continued economic growth.

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 second quarter of 2018, with real gross domestic product (GDP) increasing at an annual rate of 4.2%, following a first quarter 2018 increase of 2.2%. The increase in real GDP in the first quarter reflected positive contributions from nonresidential fixed investment, PCE, exports, federal government spending, and state and local government spending that were partly offset by the negative effects from residential fixed investment and private inventory investment.¹ This brings the US economy its seventeenth consecutive quarter with positive GDP growth. For comparison, the longest streak of consecutive quarters is thirty-nine, which occurred between 1991 and 2001.

Forecasters surveyed by the Federal Reserve Bank of Philadelphia predicted, on average, a 3.0% annual real growth rate for the third quarter of 2018 and 2.8% for the fourth. The forecasters predicted, on average, that real GDP will grow 2.8% in 2018, 2.8% in 2019, 1.8% in 2020, and 1.5% in 2021. The forecast for 2019 is higher than previous estimates, while the forecasts for 2020 and 2021 are lower than previous estimates for the same periods.²

Population

Population growth is an important driver of long-term growth in an economy. The total population increased from 326.3 million in August 2017 to 328.6 million in August 2018. The working age population (15-64) increased from 205.6 million in August 2017 to 206.6 million in September 2018. The elderly population (65+) increased from approximately 50.3 million in August 2017 to 50.6 million in August 2018.

The labor force participation rate has not budged in recent years and remains lower than pre-2008 levels. In August 2018, the civilian labor force participation rate was 62.7%. The minimum participation rate in the past decade was 62.3%, recorded in September 2015, while the maximum of 66.4% was recorded in December 2006. This is at least partially explained by the aging population but could be evidence of slack in the labor force.

Employment

Nonfarm payroll employment, according to the Bureau of Labor Statistics (BLS), rose by 201,000 in August 2018. The unemployment rate (U3) in August 2018 was unchanged at 3.9%. The BLS reported job gains in professional and business services, health care, wholesale trade, transportation and warehousing, and mining.³ This is slightly below the Federal Open Market Committee (FOMC) participants’ projections of the long-run natural rate of unemployment, which have a range of 4.0 to 4.6%.

Forecasters surveyed by the Federal Reserve Bank of Philadelphia predicted, on average, that the unemployment rate will be 3.9% in 2018, 3.6% in 2019, 3.7% in 2020, and 4.0% in 2021.⁴

The U6 unemployment rate, which includes all marginally attached workers and those employed part-time for economic reasons, has declined from 8.6% in August 2017 to 7.4% in August 2018. The gap between U3 and U6 has declined from the 10-year high of 7.4% in September 2011 to 3.5% in August 2018.

The average number of weeks unemployed has declined to near pre-2008 levels, to 22.6 weeks in August 2018, from 24.3 in August 2017. This is far below the 10-year high of 40.7 weeks in July 2011, and slightly above the 16.5 weeks in March 2008. The number of jobless claims has also been declining. For the week ending September 22, the number of seasonally adjusted jobless claims was 214,000, while for the prior year that number was 258,000.⁵

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 August 2018 on a seasonally adjusted basis. Over the previous 12 months, the all items index increased 2.7% before seasonal adjustment. The index for all items less food and energy rose 2.2% for the twelve-month period ending August 2018. The energy index rose 10.2% over the last year, while the food index increased 1.4%.⁶ The price pressures measure measures the probability that the personal consumption expenditures price index inflation rate will exceed 2.5% over the next twelve months. This price pressures measure reported a probability of 2.98% in September 2018, which is reasonably low relative to the past five years.⁷

Forecasters surveyed by the Federal Reserve Bank of Philadelphia predicted, on average, headline CPI inflation to be 2.4% in 2018, 2.3% in 2019, and 2.3% in 2020. Over the next ten years, forecasters expect CPI inflation to average 2.20% annually.⁸

Interest Rates

The interest rate on the three-month Treasury bill increased from 1.04% as of September 29, 2017 to 2.15% as of September 28, 2018.⁹ The interest rate on the ten-year Treasury note increased from 2.33% as of September 29, 2017 to 3.05% as of September 28, 2018.¹⁰

On September 26, 2018 the FOMC announced their decision to increase in federal funds target range from 1.75 – 2.0% to 2.0 – 2.25%. This increase was anticipated, and the FOMC also removed the following sentence from their official statement:

The stance of monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to 2 percent inflation.¹¹

The following charts display projections from FOMC officials of the federal funds rate path, as well as the implied projections from federal funds rate futures markets. ^{12, 13}

President Trump has expressed concern regarding the FOMC’s decisions to increase rates, and following the September 26, 2018 meeting, he said, “Unfortunately, they just raised interest rates, I am not happy about that.”¹⁴ The following table below represents the market’s reaction during the lead up to and following the FOMC meeting.

As of September 28, 2018, the yields on Moody’s Aaa-rated corporate bonds and Baa-rated corporate bonds were 3.99% and 4.89%, respectively.¹⁵

The spread between the twenty-year and the one-year treasury bills declined from 1.32% as of September 29, 2017 to 0.54% as of September 28, 2018.¹⁶ A combination of increasing short-term interest rates from federal funds rate hikes and tempered long-term growth expectations have caused the yield curve to flatten in recent years. The spread between long- and short-maturity Treasury securities have long been used as a predictive measure for future economic performance. A recent paper from the Federal Reserve showed that the probability of a near-term recession has increased in recent years.¹⁷ However, when additional information was incorporated into their model, such as the excess bond premium,¹⁸ the component of corporate bond spreads in excess of an estimate of the compensation for expected default losses, the recession probability was significantly lower.

Corporate Profits

According to the BEA, profits from current production (corporate profits with inventory valuation and capital consumption adjustments) increased $65.0 billion in the second quarter of 2018 over the first, compared to an increase of $26.7 billion in the first quarter of 2018 over the fourth quarter of 2017.¹⁹

Stock Markets

The S&P 500 Total Return²⁰ Index opened at 4,387.96 on September 30, 2017 and closed higher at 5,144.09 on September 30, 2018. This corresponds to an annual return of 17.2%. The Dow Jones Industrial Average Total Return Index opened at 48,051.36 on September 30, 2017 and closed higher at 58,028.52 on September 30, 2018. This corresponds to an annual return of 20.8%. The NASDAQ Composite Total Return Index opened at 7,447.57 on September 30, 2017 and closed higher at 9,322.12 on September 30, 2018.²¹ This corresponds to an annual return of 25.2%. In the graph below, the June 30, 2017 values were set to 100. Each of these indices is near their all-time highs.

Construction & Housing Starts

Construction spending and housing starts are two other important indicators for the economy. Construction spending may indicate the sentiment in real estate markets and the soundness of the economy, while housing starts are an alternative indicator of consumer sentiment. Increases in demand for newly-constructed homes can lead to job growth in the construction industry, increased demand for appliances and furniture, and can have a ripple effect throughout the economy. Housing starts increased from 1,185 thousand units in July 2017 to 1,174 thousand units in July 2018.²² Construction spending, a seasonally adjusted annual rate, increased from $1,242,806 million in July 2017 to $1,315,441 million in July 2018.²³

Consumer Confidence

The Conference Board reported that the Consumer Confidence Index increased in September 2018 to 138.4, up from 134.7 in August 2018.²⁴ 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 September 2018 to 100.1, up from 96.2 in August 2018 and 95.1 in September 2017.²⁵ 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.

According to Surveys of Consumers chief economist, Richard Curtin, the primary driver for the September gain was among households with incomes in the bottom third, whose index value was the highest since November 2000. On the contrary, the index for households with incomes in the top third fell 8.1% during the past seven months. Concerns over the negative impacts of tariffs were cited by nearly one-third of all consumers in September.

Conclusion

In conclusion, the economy continued to perform well in the second quarter of 2018. Economic growth exceeded expectations, reaching over 4% annualized growth for the first time since quarter three of 2014. Inflation has been modest while unemployment remains low, hovering around FOMC participants’ projections of the natural rate of unemployment. Equities markets have been performing exceptionally well, near all-time highs, and both consumer and investor sentiment remains optimistic. Threats to the economy include potential ramifications from rising tariffs, the impact of the Federal Reserve’s decision to increase the federal funds rate, and political instability as we approach the midterm elections.

The following table displays a summary of the economic indicators, their performance over the past year, and whether this is viewed as a positive or negative sign for the economy at large. The leading, lagging, and coincident indices were obtained from The Conference Board.

1. U.S. Department of Commerce, Bureau of Economic Analysis, Gross Domestic Product: Second Quarter 2018 (Third Estimate), September 27, 2018

2. Federal Reserve Bank of Philadelphia, Third Quarter 2018 Survey of Professional Forecasters, August 10, 2018

3. United States Department of Labor, Bureau of Labor Statistics, The Employment Situation: August 2018, September 7, 2018

4. Federal Reserve Bank of Philadelphia, Second Quarter 2018 Survey of Professional Forecasters, August 10, 2018

5. United States Department of Labor, Bureau of Labor Statistics, Unemployment Insurance Weekly Claims, September 27, 2018

6. United States Department of Labor, Bureau of Labor Statistics, Consumer Price Index: August 2018, September 13, 2018

7. Federal Reserve Bank of St. Louis, Federal Reserve Economic Data, Series: STLPPM, Price Pressures Measure, last accessed October 1, 2018

8. Federal Reserve Bank of Philadelphia, Third Quarter 2018 Survey of Professional Forecasters, August 10, 2018

9. Federal Reserve Bank of St. Louis, Federal Reserve Economic Data, Series: DTB3MS, 3-Month Treasury Bill: Secondary Market Rate, last accessed October 1, 2018

10. Federal Reserve Bank of St. Louis, Federal Reserve Economic Data, Series: DGS10, 10-Year Treasury Constant Maturity Rate, last accessed October 1, 2018

11. Wall Street Journal, Fed Statement Tracker, https://projects.wsj.com/fed-statement-tracker-embed/

12. Federal Open Market Committee, Summary of Economic Projections, September 26, 2018

13. Federal Reserve Bank of Atlanta, Market Probability Tracker, last accessed September 27, 2018

14. USA Today, “Why Trump’s Fed-bashing is bad for the economy,” September 26, 2018

15. Federal Reserve Bank of St. Louis, Federal Reserve Economic Data, Series: DAAA, Moody’s Seasoned Aaa Corporate Bond Yield©, Series: DBAA, Moody’s Seasoned Baa Corporate Bond Yield©, last accessed October 1, 2018

16. U.S. Department of the Treasury, Daily Treasury Yield Curve Rates, last accessed October 1, 2018

17. Johansson, Peter, and Andrew Meldrum (2018). “Predicting Recession Probabilities Using the Slope of the Yield Curve,” FEDS Notes. Washington: Board of Governors of the Federal Reserve System, March 1, 2018, https://doi.org/10.17016/2380-7172.2146

18. Gilchrist, S., and E. Zakrajšek (2012), “Credit Spreads and Business Cycle Fluctuations,” American Economic Review 102(4), pp. 1692-1720

19. U.S. Department of Commerce, Bureau of Economic Analysis, Corporate Profits: Second Quarter 2018, September 27, 2018

20. Total return indices include returns from both income and capital gains

21. S&P Capital IQ Database, last accessed October 1, 2018

22. Federal Reserve Bank of St. Louis, Federal Reserve Economic Data, Series: HOUST, Housing Starts, last accessed October 1, 2018

23. Federal Reserve Bank of St. Louis, Federal Reserve Economic Data, Series: TTLCONS, Total Construction Spending, Seasonally Adjusted Annual Rate, last accessed October 1, 2018

24. The Conference Board, Consumer Confidence Index, September 25, 2018

25. University of Michigan, Surveys of Consumers, September 2018

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