Economic Data

Economic reports released in December 2017, which mostly reflect economic activity in November, largely exceeded economists’ consensus expectations and suggested continued steady growth in the U.S. economy. Data pointed to an economy that picked up some speed from the 2.2% average pace of growth during the current economic expansion. The Bloomberg-surveyed consensus estimate for fourth quarter gross domestic product (GDP) growth stood at 2.7% as of year-end, following the revised 3.2% GDP growth rate reported for the third quarter.

Measures of economic surprises relative to expectations continue to reflect an economy that is growing faster than economists’ expectations. The Citi U.S. Economic Surprise Index, a standardized average of economic data compared to economists’ expectations, rose to its highest level since 2007. Bloomberg’s U.S. Economic Surprise Index, which uses a longer moving average and therefore responds more slowly, rose to its highest level ever recorded in the 18 year history of the index. Expectations have remained fairly subdued due to the extended period of subpar growth over the past decade, skepticism toward the potential impact of the tax law, and hurricane disruptions.

Consumer-oriented reports were mostly positive in December. U.S. retail sales rose at their strongest pace during the holiday period since 2011. And although consumer spending in the third quarter GDP report only rose at a 2.2% annualized rate, it may accelerate in the fourth quarter. A solid 228,000 new jobs were created in November, nicely above expectations for the monthly payroll employment report. A survey of consumer confidence conducted by the University of Michigan for both current conditions and future expectations dipped slightly, as did the Conference Board’s measure, though both remain elevated.

Housing data mostly surprised to the upside, including new and existing home sales, while natural disasters supported housing construction.

Consumer inflation remained well contained, decelerating to 1.7% year over year excluding food and energy, though headline inflation rose 2.2% year over year, while producer inflation is showing some pipeline pressures building. The Federal Reserve’s (Fed) preferred measure of inflation, the Personal Consumption Expenditures (PCE) Index, rose 1.8% year over year in November and 1.5% excluding food and energy.

Business investment picked up in the third quarter, increasing at a solid 10.8% annualized pace and driving the second straight quarter of 3.0% or more GDP growth. Manufacturing surveys for November, reported in December, remained quite strong. The ISM Manufacturing Index, at 58.2, met expectations and remained near the highs of the economic expansion despite dropping 0.5 points from the prior month. Regional surveys mostly showed strength, including those in Dallas, Chicago, and Philadelphia, although the Richmond and Kansas City regional surveys fell slightly short of expectations.

Indicators that tend to lead economic activity suggest steady growth appears likely to extend well into 2018. The Conference Board’s Leading Economic Index (LEI), an aggregate of ten leading indicators, rose solidly in November, boosted by improving financial indicators, strong new manufacturing orders, and high consumer sentiment. The year over-year change of 5.5% is the strongest since April 2015. Positive year-overyear growth has historically been associated with a low chance of a recession in the next year. Strength in leading indicators over the last six months in particular suggests the odds of a recession in the next year remain below the historical average.

Central Banks

December was a busy month for global central banks which, collectively, continue to move gradually toward monetary policy normalization.

The Fed’s policy committee raised its target interest rate, the fed funds rate, by 0.25% on December 13, which was the fifth hike of the economic expansion in the last official meeting under Janet Yellen’s leadership. The Fed also upgraded its 2018 and longer-term economic growth outlooks, while maintaining forward guidance for monetary policy. The Fed expects 2.5% GDP growth in 2018, up from its prior forecast of 2.1%, and is calling for three rate hikes in 2018 based on the average committee member forecast, the so-called “dot plots”.

Turning to other central banks, the People’s Bank of China followed the Fed with a small 0.05% rate hike a few hours after the Fed’s decision on December 13. The following day, the Bank of England and European Central Bank (ECB) left rates and bond purchase plans unchanged. Like the Fed, the ECB upgraded its economic outlook. On December 21, the Bank of Japan made no changes to its monetary policy but did make somewhat more hawkish statements that suggest a tapering plan may be forthcoming.

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