Pollack: In a word–optimism

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December 27th, 2016
The Monday Morning Quarterback
A quick analysis of important economic data released over the past week
Despite a good third quarter real GDP number, expectations among economists are that the fourth quarter number will again be tepid at best and that the results for the year as a whole will be under 2.0% growth.  Yet, as we leave 2016, Americans are feeling more optimistic about the economy in that the long string of mediocre results for annual real GDP growth seems more likely to be coming to an end soon.  For example, consumer sentiment ended December at new highs for the cycle.  This index began to take off in November following Trump’s victory as a record percentage of respondents “spontaneously mentioned” the expected favorable impact of new economic policies as a positive for the outlook.  What the policies finally look like when they are finalized and after the normal political compromises are made, remains to be seen.   But, unless congress guts the proposals, the change in policy should spur economic growth even this late in the cycle.  This would be very good news given this week’s data.  While labor markets continue to improve, there has been little improvement in wage growth so far. Corporate profits continue to be on a plateau first reached in 2011.  Manufacturing remains weak. And leading indicators were flat.  On the other hand, both new and resale housing continue to sell well.
Overall, while the current picture remains very much what we have become used to over the last several years, the economic outlook, once the changes occur, looks likely to improve.
Since no significant data is expected to be released in the week between Christmas and New Year’s, the next MMQ will be on Monday, January 8th.  We at Elliott D. Pollack & Co. wish you all a very happy and healthy new year and a prosperous 2017.
U.S. Snapshot:
  • Real GDP in the 3rd quarter increased at a 3.5% annual rate.  This follows annualized growth rates of 1.4%, 0.8% and 0.9% over the prior three quarters.  The acceleration in the third quarter was a combination of an increase in private inventory investment, exports and federal government spending and smaller decreases in state and local government spending and residential investment.  The expectations among economists is that the fourth quarter real GDP number will show an annualized growth rate of less than 2.0% and that for 2016 as a whole, real GDP will be up 1.6%.
  • Leading indicators in November were flat.  The 124.6 level was the same as October.  This is not a concern as leading indicators during 2016 continued, for the most part, on an upward trend, although at a moderate pace of growth.
  • The University of Michigan consumer sentiment index ended December at 98.2 for a new cyclical high.  This index began to accelerate in November after the Trump victory.  A record percentage of respondents, at 18%, suddenly mentioned favorable impact of new economic policies.  The prior record was 9% after Reagan’s victory in 1981.
  • Personal income was essentially flat in November when compared to October.  It stood 3.5% above year earlier levels.  Disposable personal income was also flat for the month and was up 3.7% from a year ago.  Personal consumption expenditures, though, were up 0.2% for the month and were up 4.2% from a year ago.  Thus, the savings rate fell from 6.0% a year ago to 5.5% in November.  This is not a good sign going into the Christmas season.
  • Mortgage rates continued to climb in the week of December 22.  30-year rates hit 4.30%.  This was up from 4.16% the prior week and 4.03% the week of November 23rd.
  • New home sales in November were up 5.2% from October and 16.5% from a year earlier.  A total of 592,000 sales took place in November.
  • According to the National Association of Realtors, November resales of single family homes were down 0.4% over October and up 16.2% over a year earlier.
  • Corporate profits as of the third quarter stood 2.1% above year earlier levels but remain in a range first reached in 2011.
  • Manufacturers’ new orders for durable goods were down 1.9% from a year ago in November.
Arizona Snapshot:
  • R.L. Brown reported good news for the Greater Phoenix housing market.  According to R.L., there were 1,316 housing permits issued in November.  This was 22.3%above year earlier levels.  Year-to-date, 16,472 single family permits were issued, that was up 12.6% over the first 11 months of 2015.  According to R.L., “November was an exciting housing month and everyone involved in it should be smiling.  Activity remained strong across the valley in November and across the spectrum of permit activity, new home closings and resale closings.”
  • The Southern Arizona housing market (Greater Tucson) also enjoyed exciting results in November.  Permits were up 55.2% from a year ago to 208 for the month.  Annual permits volume is expected to reach about 2,700 permits this year.  That would be a 25% increase over 2015.
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