Economic Insights - November 2016

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Now, let’s consider what the data tells us about prospects for the economy in late 2016 and early 2017.

We’ll start with retail sales, which rebounded at a robust 0.6 percent in September, finishing the third quarter on a strong note.  Growth was led by volatile components, such as autos and gas stations.  However, the gains were also broad, with ten of thirteen major categories of sales growing in September. “Core” sales, which exclude autos, building materials, and gasoline, rose 0.2 percent in September and were up 3.1 percent from a year earlier.  Although sales at gas stations rose 2.4 percent in September, they’re still down 3.4 percent from a year earlier due to lower oil prices; vehicle miles driven in the United States were at the highest levels in history over the past twelve months.  In other words, weakness at gas stations signals the ability to consume elsewhere.

Incorporating the September data into our models, we now estimate that “real” (inflation-adjusted) consumer spending on goods and services, combined, rose at about a 2.5 percent annual rate in the third quarter.  As a result, we’re now forecasting that the final read on real third quarter GDP growth will be a 2.5 percent annual rate. Either way, look for continued growth in both real GDP and real consumer spending in the months ahead.  Employment continues to expand, while wage growth is accelerating and consumer debt service obligations are low by historical standards.  Overall, the economy remains Slow-but-Steady, while consumer purchasing power and, therefore, spending, remains one of the bright spots.

An even brighter spot is the labor market.  Recently initial unemployment claims tied the lowest level since November 1973, with their 85th consecutive week below 300,000.  Meanwhile, continuing claims declined 16,000 to a new low for this cycle.  Plugging these figures into our models suggests payroll growth was in 200,000 to 225,000 range for October, which should keep the Fed on track for raising rates by the end of the year.

After suffering a setback in August, industrial production rose modestly in September, continuing to demonstrate the type of “fits and starts” recovery that has become...

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