Market Commentary, October 17, 2016
Economic Commentary - 3Q 2016
GDP
Economic growth continues to be driven by the consumer. Personal consumption expenditures, a positive contributor to GDP growth since the first quarter of 2010, added 290 basis points to second quarter GDP. Conversely, business investment has been a material drag on GDP in three of the last four quarters, subtracting 134 basis points from second quarter GDP. With net exports slightly positive in the second quarter and government expenditures detracting 30 basis points, second quarter GDP increased from a paltry .82% gain in the first quarter to a 1.42% second quarter gain. While not robust, it was a welcome uptick in economic growth. We expect this pattern to continue – personal consumption positive while businesses contend with rising wages, a strengthening dollar, weakening global demand, and declining corporate profits and earnings growth. At some point, however, without a reversal in corporate profits, employment may feel the impact of weak profits and earnings.
Employment
The third quarter brought a welcome stabilization in employment growth, delivering nearly 200,000 jobs per month after a roller coaster second quarter that featured two months of job growth below 150,000 – including a disconcerting 24,000 in May. Setting aside the bounce back employment growth in July, the 150,000 job gain average in August and September is in line with our expectations for continued near-term employment growth closer to 150,000 jobs per month than 200,000 jobs per month, as labor market slack makes finding qualified employees increasingly difficult.
Employee Earnings
Although employment growth is moderating, because it is supply side driven, future earnings are not necessarily in jeopardy. Wage growth continues due to limited qualified labor supply, with year-to-date average hourly earnings growth up 2.5%, a 30 bps increase over the same time period in 2015. We expect this growth trend to continue.
Global Economy
The global economic and political landscape remains uncertain. Japan is fighting deflation; the European Union is in a state of flux due both to Brexit and increasing questions surrounding the European banking system; and China continues the delicate balancing act of transitioning from an investment-driven economy to a consumption-based one. As evidence of these collective challenges, one-third of the world’s GDP is now operating under negative sovereign debt yields.
We expect the U.S. economy, however, to continue on its current pace, generating adequate employment growth and increasingly favorable employee earnings to support future consumption. This should, in turn, support retail, office, industrial, and multifamily demand.