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Your Bank > News

CNB Economic Comments August 14

August 15, 2017

To: Everyone
From: Gregory S. MacKay, Economist

As of this writing, the war of words between the U.S. and North Korea has softened a bit. U.S. administration officials see no indications of a nuclear war, and both President Trump and China President Xi Jinping have committed to denuclearizing the Korean peninsula. Equity prices globally are advancing, while bond yields that moved upward and gold gave back some of their recent gains.

The decreasing geopolitical tensions have allowed us to consider a couple of growing conundrums in the economy:

  1.  stock price/earnings ratios are approaching highs, while GDP growth remain moderate, at best
  2.  consumer confidence surveys remain relatively firm, while consumer spending slows

The Standard and Poor’s 500 Index is up about 14% since election day, with a price/earnings multiple of about 21, while GDP growth has remained moderate, at about 2.1% annualized for the past several quarters. There has been some discussion of “asset bubbles” developing in the financial markets, as stocks reach levels that need further support, and bond yields remain near the bottom of trading ranges as fears of inflation continue to shrink. The Producer Price Index (PPI) fell .1% in July and rose only 1.9% in the past year. The Consumer Price Index (CPI) increased .1% in July and is up only 1.7% in the past year. The Fed’s favorite inflation indicator - Personal Consumption Expenditure Index – was flat in June and was up only 1.4% in the past year. So inflation is comfortably settled in a “modest” range, leaving the Fed predictions of 2%+ inflation out of touch. Business indicators have modestly added to GDP. Durable and non-durable goods orders have both slowed in recent months, with the exception of civilian aircraft. Overall, all manufacturing industry orders are up 5.6% year-to-date over 2016, a level that is moderate at best. With the Fed ramping up its plan to shrink the size of its bond portfolio by slowing reinvestment and still considering interest rate increases, further growth in GDP is going to depend on some firm fiscal stimulus in the form of promised deregulation and income tax cuts. While cuts are certainly necessary, stiff resistance to changes in charitable and mortgage interest deductions have signaled a tough battle to get the reforms done.

Consumers seem to be saying one thing and doing another. A highly respected survey of consumers suggests that people continue to believe strongly in a better current and future economy. This makes sense, as monthly employment gains have averaged 195,000 for the past three months, and the unemployment rate remains below 4.5%. However, there are slightly less ebullient statistics available. Disposable personal income in inflation adjusted dollars was negative in June, and personal consumption expenditures (inflation adjusted) have been weak through most of 2017. Another sign of consumer caution is the fact that the personal savings rate was only 3.8% in the second quarter of 2017, down from 5.3% in the second quarter of 2016. That is certainly part of the reason that consumer credit growth continues to shrink. Credit card usage and car loans have slowed from year ago levels. With real weekly earnings up only 1.1% in the past year, it’s no surprise that retail sales fell .2% in June and are down three out of the last six months. Overall June retail sales were a modest 2.8% over June 2016, with weak showings in grocery stores, gasoline sales, department and miscellaneous stores, and restaurants. Even internet sales growth slowed. So the good news of job growth has been trumped by a lack of growth in buying power. We’re not in a stall yet, but I’ll reiterate the need for some serious fiscal stimulation to keep this expansion going.

Stocks had a bit of geopolitical nervousness last week that shaved some of the recent gains from prices. At today’s opening, for the week and year:

Index 08/14/17 Weekly Change Year-to-Date Change
Dow Industrials 21858 -1.1% +10.6%
NASDAQ 6257 -1.5% +16.2%
S&P 500 2441 -1.5% +9.0% 

Treasury and municipal bond yields all fell a bit over the two week period as tame inflation data offset the geopolitical arena.

Return Period
U.S. Treasuries Municipal Bonds
08/14/17 07/28/17  08/14/17 07/28/17
2 year 1.32% 1.35% 0.89% 0.98%
5 year 1.77% 1.83% 1.17% 1.26%
10 year 2.22% 2.29% 1.87% 1.90%