Economic Insights - June 2017

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Economic data is volatile.  Weather, seasonal adjustments, calendar flukes, and measurement errors all affect the data.  Nonetheless, those with a political axe to grind, or an economic forecast of recession or boom, will grab one piece of data and act as if they have discovered the Holy Grail.

We saw this happen with First Quarter 2017 real GDP growth, for which the first estimate was reported at just 0.7 percent.  Pessimists went into a tizzy, but they shouldn’t have.  We argue that the slow but-steady economy, is still fully intact and is still waiting for real changes to fiscal policy.

Despite the soft first quarter report, real GDP was still up 1.9 percent from a year earlier; that’s very close to the post-crisis trend line.  The pace of inventory accumulation fell, pulling down the number; but this is unlikely to continue.  “Core” GDP, which excludes item which can’t be counted on for sustainable growth, like inventories, government spending, and trade with the rest of the world, grew at a 2.2 percent pace in the first quarter and was up 2.8 percent from a year earlier.

In fact, there were some key signs of a pick-up in growth ahead.  For instance, business fixed investment soared in the first quarter, growing at a 9.4 percent annual rate, the fastest pace for any quarter since 2013.  And corporate profits are accelerating.  With roughly 60 percent of the S&P 500 having reported for Q1 so far, earnings are up about 15.6 percent from a year ago.

Meanwhile, home building grew at a 13.7 percent annual rate in the first quarter, the fastest pace for any quarter since 2015.  Although the recovery in home building is about seven years old, we expect gains in housing to continue for at least the next couple for years as builders battle pent-up demand from population growth, scrappage, and years of under-building.

Yes, consumer spending grew at only a 0.3 percent annual rate in the first quarter, but a few extenuating circumstances suggest a hearty rebound in the second quarter.  First, autos sales were unusually weak in the first quarter, in part a reflection of an unusually late March snowstorm in the East. Second, unusually warm weather in January and February suppressed utility...

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