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Your Bank > News

CNB Economic Comments November 10

November 13, 2017

To: Everyone
From: Gregory S. MacKay, Economist

Look no further than the FOMC statement following its October 31 - November 1 meeting to get the ongoing drift of the economy. Economic growth is improving at a “solid rate,” the labor market “continues to strengthen,” household spending is expanding at a “moderate rate,” and business fixed investment has “picked up.” Only inflation continues to befuddle the Committee. The recent choice of Jerome Powell as the next FOMC Chair was met with enthusiasm by market forces who were looking for stability going forward. Mr. Powell appears to be a centrist who will lead a FOMC that will have three or four new members. This at a time when only inflation is holding back a steady course of interest rates hikes, and the debate on the pace of inflation is a regular discussion item at FOMC meetings.

The latest Personal Consumption Expenditure Index (PCE) for September showed a small bump caused by the hurricane season, increasing .4% for the month. However, factoring out food and energy prices, the index rose a minuscule .1% for the month. Furthermore, the changes from one year ago put no credence in any type of inflationary pressures. The PCE has risen only 1.6% from year ago levels, and excluding food and energy has increased a mere 1.3%. There just isn’t any inflation issue in the near term, and when prices will accelerate is open to debate.

Recent business data remains mildly positive. All factory orders thus far in 2017 rose 5.6% over the comparable period in 2016. Non-durable goods orders rose 6%, while durable goods were up 5.2%, both showing enough strength to keep overall GDP growing well above 2%. U.S. Productivity had a good third quarter, increasing 3% over the second quarter and up 1.5% from year ago levels. Output rose strongly in the third quarter, while hours worked advanced moderately. Hourly compensation spiked a bit in the third quarter, but rose only 1.4% over year ago levels, and unit labor cost actually fell .1% year-over-year.

The October employment report showed a substantial recovery from the hurricanes. There were 261,000 jobs added after September’s revised gain of only 18,000. For the past three months, job gains have averaged 162,000, or about normal for a mature economic cycle. Most noticeable was the change in leisure and hospitality help. With travel and tourism virtually shut down in September, the industry lost 102,000 jobs, but gained 106,000 in October. Good gains were also reported by professional and business, health care, and manufacturing. Unemployment fell to 4.1%, and the number of unemployed has fallen by 1.1 million people since January. Average weekly wages moved up 2.4% from last year to $912.63, a level consistent with moderate growth. Consumer credit levels expanded nicely in September, even as the hurricanes swept through. Both revolving (+7.7%) and non-revolving (+6.3%) credit grew sufficiently to offset generally weak July and August figures, supporting the growing retail sales levels and supporting still strong consumer confidence levels.

The legislative front remains clouded, as seemingly bipartisan agreement on tax reform has hit a speed bump. As of this writing, there seems to have developed a difference between House and Senate views on the timing of corporate tax reductions, state and local income tax deductibility, and the repeal of the estate tax. Some serious negotiating will have to happen to have a tax bill by Thanksgiving.

The sudden division on the tax bill has made equity markets a bit queasy this week. At 1:29 p.m., for the week and year:

Index 11/10/17 Weekly Change Year-to-Date Change
Dow Industrials 23417 -0.5% +18.5%
NASDAQ 6746 -0.3% +25.3%
S&P 500 2580 -0.3% +15.2%

 Bond yields have settled into a slightly higher pattern over the past month.

Return Period
U.S. Treasuries Municipal Bonds
11/10/17 10/27/17  11/10/17 10/27/17
2 year 1.65% 1.62% 1.16% 1.09%
5 year 2.05% 2.07% 1.51% 1.45%
10 year 2.40% 2.45% 1.99% 2.04%