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Your Bank > News

CNB Economic Comments July 28

July 31, 2017

To: Everyone
From: Gregory S. MacKay, Economist

The latest Federal Open Market Committee (FOMC) meeting wrapped up on July 26th with no interest rate changes. The often used boilerplate of “the labor market has continued to strengthen and economic activity has been rising moderately this year” again appeared. There have been good job gains this year averaging 180,000 per month for the first six months of 2017, down only slightly from the full year average in 2016. Household spending has strengthened recently, with personal consumption expenditures increasing 2.8% in the second quarter of 2017, after a mediocre rise of 1.9% in the first quarter. Likewise, business spending increased 2.0% in the second quarter after an abysmal showing of -1.2% in the first quarter. Equipment spending and almost neutral inventory investment growth offset a downturn in residential building and slower growth in some business categories.

Yet the FOMC made slight adjustments to their statement to acknowledge an economy that remains inflation resistant. Accepting that some transitory issues that have held inflation in check have not abated, the FOMC removed some qualifying language and indicated that lower inflation continues. Indeed, after reaching 2.1% in February, the Personal Consumption Expenditure (PCE) Index has fallen to 1.4% in May, and the “core” PCE (no food or energy) has fallen from 1.8% to 1.4%. Although inflation is solidly below the 2% goal for 2018 and beyond, the FOMC continues to project a federal funds rate of 2.1% in 2018, or a 1% increase over the next year and a half, saying it believes “economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate.” There just aren’t any wage or price issues currently in sight to support that view, and markets have not priced themselves to that premise. Barring any further decline in inflation data, and given ongoing moderate (2% annual) economic growth, there will be one more federal funds rate hike in 2017. Sensing the economy is strong enough to bear another hike, the FOMC will continue to build rates to give some breathing room in the event of a mild downturn in growth.

Another issue addressed in the FOMC statement was the timing of the reduction in the Federal Reserve’s holding of Treasury and Agency Bonds, The FOMC suggested that implementation could begin “relatively soon” if the economy stays on track. Look for a September announcement of an October start for a program that will take several years to reduce the portfolio to a more normal size.

The first estimate of second quarter 2017 GDP growth supported the concepts that the economy is growing neither too fast nor too slow, and inflation continues to subside. Second quarter economic growth was measured at 2.6% following a revised downward first quarter of 1.2%. Thus, the first half of 2017 saw our economy grow at about 1.9%, or about the average of the first halves in the preceding three years. PCE inflation on a year-over-year comparison was down from 2% in the first quarter to 1.6% in the second quarter, and the core level fell from 1.8% to 1.5%.

Looking ahead to the rest of the year, the best news is the continued strength in consumer confidence levels, which remain elevated due to rising home and stock prices. Housing sales remain moderate, with existing home prices up 6.5% over last year due to lack of supply. However, single family starts are up 10% from year ago levels, with new home sales up 9.1% for the same period. Business spending remains moderate. While the latest durable goods orders data for June showed a remarkable 6.5% gain, all of that gain was in civilian aircraft. That’s not to say that business spending is weak, as total durable goods orders are up 5% year-to-date over 2016, with generally good results in most categories. Without some kind of geopolitical problems, or any unusual movement in oil, both the third and fourth quarter GDP growth should approach or surpass 2.7%.

Stock prices remained fairly elevated in the absence of any negative news this week. At 2:20pm, for the week and year:

Index 07/28/17 Weekly Change Year-to-Date Change
Dow Industrials 21802 +1.0% +10.3%
NASDAQ 6374 -0.2% +18.4%
S&P 500 2470 -0.1% +10.3%

Treasury yields were stable, while municipals yields fell on lack of supply.


Return Period
U.S. Treasuries Municipal Bonds
07/28/17 07/14/17  07/28/17 07/14/17
2 year 1.35% 1.35% 0.98% 1.04%
5 year 1.83% 1.86% 1.26% 1.36%
10 year 2.29% 2.32% 1.90% 1.99%