Economic Insights - February 2018

Comments Off on Economic Insights - February 2018
Economic Insights - February 2018 LoadingADD TO FAVORITES

Based on the first estimate of fourth quarter GDP, we can safely say that the economy grew at least 2.5 percent in 2017.  That’s an acceleration from the average rate of 2.2 percent from the start of the recovery in mid-2009 through the end of 2016.  Notably, what we call “core” GDP grew at a 4.6 percent annual rate in the fourth quarter and was up 3.3 percent in 2017.  “Core” GDP is inflation-adjusted GDP growth excluding government purchases, inventories, and international trade; it’s the best measure of private-sector activity in the domestic economy.

Despite this good news, some pessimistic analysts were calling attention to a drop in the personal savings rate to 2.6 percent in the fourth quarter; that was the lowest savings level since 2005.  The pessimists' theory is that if the personal savings rate is so low, consumers must, once again, be “in over their heads.”  So “watch out below!”

However, this is superficial analysis of the savings rate data, which leaves out some very important points.

First, consumers don't get purchasing power just from their current income; they also get it from the value of their assets.  And asset values soared in 2017.  For one thing, investors (correctly) anticipated better economic policies.  As a result, the market cap of the S&P 500 rose $3.7 trillion, while the value of owner-occupied real estate looks like it increased about $1.5 trillion.  That could be a problem if we thought stock market or real estate was overvalued, but our capitalized profits approach says the stock market is still undervalued and the price-to-rent ratio for residential real estate is near the long-term norm, not wildly overvalued like it was in 2005.
Second, the tax cut that's taking effect is going to raise after-tax income.  According to congressional budget scorekeepers, the tax cut on individuals should reduce tax payments by $189 billion in 2019, which is equal to 1.3 percent of last year's after-tax income.  So, consumers are going to be able to save more in the next few years, even if we don't include the extra income that should be generated by extra economic growth.

Third, the personal savings rate doesn't include withdrawals from 401Ks and...

To continue reading, become a paid subscriber for full access.
Already a Business Briefings subscriber? Login for full access now.

Subscribe for as low as $135/year

  • Get 12 months of Business Briefings that will impact your business and your life
  • Gain access to the entire Business Briefings Research Library
  • Optional Business Briefings monthly CDs in addition to your On-Line access
  • If you do not like what you see, you can cancel anytime and receive a 100% pro-rata refund