January Economic Update

A Happy New Year to you and yours!

December wrapped up 2016 with a strong rally in the U.S. financial markets with positive economic data underlying the strength of the economy. The U.S. economy saw a rise in consumer confidence, improved home sales, and a drop in unemployment rates. The Federal Reserve increased its interest rate target to a range of 0.50-0.75%, which is only the second adjustment to the federal funds rate in two years. Oil prices increased for the first time in three years due to an OPEC agreement to cut oil production. While the Dow Jones Industrial Average did not top 20,000 in December, it did advance nicely, gaining 3.34% and prompting optimism on both Wall Street and Main Street. (1,2,3)

Domestic Economic Health

The Fed adjusted its dot-plot for the next three years as it raised the benchmark interest rate by a quarter-point in December. Its latest forecast projects two to three rate hikes per year through 2019, with three occurring this year. Fed policymakers see the economy expanding 2.1% this coming year. (2)The Department of Labor’s latest jobs report noted payroll growth of 178,000 net new hires in November and a drop in unemployment by 0.3%, the lowest since August 2007. The average hourly wage was $25.89, up 2.5% in the past year. (4)Household confidence aside, November’s personal spending and retail sales numbers were “run-of-the-mill” with the Department of Commerce citing a modest rise in consumer spending of 0.2% and retail purchases up only 0.1%.(2)

The Department of Labor’s latest jobs report noted payroll growth of 178,000 net new hires in November and a drop in unemployment by 0.3%, the lowest since August 2007. The average hourly wage was $25.89, up 2.5% in the past year. (4)

Household confidence aside, November’s personal spending and retail sales numbers were “run-of-the-mill” with the Department of Commerce citing a modest rise in consumer spending of 0.2% and retail purchases up only 0.1%. (5,6)

Real Estate

The National Association of Realtors stated another 0.7% increase in home resales while the Census Bureau cited an impressive 5.2% jump in new home buying. As for home prices, the October edition of the S&P/Case-Shiller home price index showed a 5.6% year-over-year gain. While 2016 has been an impressive year in real estate, the NAR reported a 2.5% drop in pending home sales in November. Bloomberg reported the average interest rate on a 30-year mortgage approaching a five-year high. (5,7,8)

Looking Forward to the New Year

Could the bull run slow to a trot in January or will the Dow rise above 20,000? Entering 2017, there are some factors that could certainly provide a tailwind for the bull market. If consumer confidence remains high and employment and wage data continues showing improvement, this bodes well for consumer spending and, by extension, near-term corporate earnings. Also, if infrastructure spending ramps up this year, the resulting job growth could foster wage growth. While this current bull market is one of the longest, continued economic growth is essential in order to maintain this bullish pace. (1,8)

Citations:

1.) barchart.com/stocks/indices.php?view=performance [12/30/16] 2.) cnbc.com/2016/12/14/fed-raises-rates-for-the-second-time-in-a-decade.html [12/14/16] 3.) bloomberg.com/news/articles/2017-01-03/oil-starts-new-year-higher-as-kuwait-delivers-on-opec-output-cut [01/03/17] 4.) blogs.wsj.com/briefly/2016/12/02/november-jobs-report-the-numbers-3/ [12/2/16] 5.) investing.com/economic-calendar/ [1/1/17] 6.) briefing.com/investor/calendars/economic/2016/12/12-16 [12/16/16] 7.) marketwatch.com/economy-politics/calendars/economic [12/30/16] 8.) fool.com/mortgages/2016/12/30/with-trump-reflation-mortgage-rates-end-2016-near.aspx [12/30/16

This post has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. Bob Lawson is not engaged in rendering legal or accounting services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.