Steady As She Goes
We are 27 quarters into the current economic expansion, albeit the weakest on record with a historically low 2.1% average annual GDP growth rate. The average duration and GDP growth rate of prior economic expansions is approximately 6 years (25 quarters) and 4%, respectively, thus it would not be surprising if we are nearing the tail end of the current expansion. In fact, we are seeing some slowing, particularly in B2B manufacturers serving industrial applications, which is evidenced by the Industrial Production Index, an economic indicator measuring real output for all facilities located in the United States in manufacturing, mining, and electric and gas utilities. Further, net new job growth, while still positive, has been on a downward trajectory since 2014.
The economy seems to be treading water against a current of globally soft economic activity, an unusually strong dollar and political uncertainty. That being said, there are reasons to believe the current expansion still has legs driven by stronger consumer spending, the prospect of corporate tax reform and government sponsored infrastructure spending and regulatory reform. In fact, the most recent Philadelphia Fed survey of 42 economists predicts real GDP will grow 2.2 percent in 2017.
The post-election surge in the stock market is indicative of investors’ optimism the new administration achieves its stated mandate to reform the corporate tax code and roll back onerous regulations. This perspective is currently being shared by consumers as reflected in a Consumer Confidence Index (“CCI”) score of 91.6 in November, an increase from 87.2 in October. Importantly, the CCI is a leading indicator of consumers’ spending which is responsible for approximately 66% of domestic GDP. We share the aforementioned Philadelphia Fed perspective for continued moderate growth in 2017 fueled by consumer spending, particularly in new housing and home remodeling expenditures.