As of this date, estimates for first quarter gdp growth range from o.5% by the atlanta fed to 2.1% for the new york fed. Economists I follow project first quarter gdp growth in the low one percent range. In past years, first quarter gdp growth generally disappointed. If you recall, last year’s preliminary estimate of first quarter gdp growth showed a decline. Based on this year’s forecasts, first quarter gdp growth will likely be lacklustre. However, in the past, the following quarters generally produced better growth rates. Will we see a repeat of this quarterly pattern in 2017?
First The Economic Drag In 2017
Some key contributers to ensuring growth in past years will not be present in 2017. Very importantly, the fed shifted from a very accomodative monetary policy in past years to one less so. The second contributor to past strength in the ensuing quarters came from the growth of vehicle sales. Recent reports showed annualized vehicle sales declined 10% from december levels. Strong used vehicle prices play an important role in new vehicle sales but currently remain under pressure. Therefore, it seems doubtful that vehicle sales will continue to play an important role in supporting current economic growth.
Now The Economic Push In 2017
At the same time, offsets to this drag will likely show up in 2017. For example, the recovery in the oil patch, with demand for ancillary services and equipment increasing, should contribute to y-o-y economic growth. Add to that, the recent weakening of the u.s. Dollar will likely provide another push to economic growth as the year progresses. Last year the stronger dollar acted as a drag by producing a similar economic impact as higher interest rates. And now we see the reversal of that impact. The wall street journal dollar index declined 2.8% in the first quarter of 2017 and that trend continues. Part of this weakening reflects reduced optimism that new stimulative fiscal policies would get through congress in the very near future. The second reason for dollar weakness likely stems from the improving economies outside the united states. Recently the international monetary fund issued its forecast for global economies. The agency projected world growth to rise from 3.1% last year to 3.5% in 2017. For developing nations, the i.m.f. Forecasted growth of 4.5% compared to 4.1% last year. In comparison, they project u.s. Gdp growth to reach 2.3% in 2017 compared to 1.6% last year.
Federal Government Partial Shutdown
That brings us to the risk of a partial federal shutdown when congressional appropriations run out on april 28th. To avoid a shut down, congress will need to come to agreement on implimenting a new spending bill. As a reminder, the bill may need 60 votes in the senate if aprpopriations in the bill—or their removal-- proves unacceptable to the democrats. One likely solution will be to pass a short-term appropriations extension that avoids any controversial issues. Once again, kicking the can down the road but not too far. By the end of this fiscal year (9/30/17), congress will be forced to face up to both a long-term appropriations extension and increasing the debt limit.
Congress-To Do Or Not To Do
The president seems to be asking congress to reconsider reforming obamacare before moving onto tax legislation. If this proves to be the case, it would likely push back, for some time, consideration of tax rate reductions. Repeating our past comment in earlier notes, we do not expect to see a broad tax reform package. Importantly in our view, tax rate reductions remain key to the economic outlook, particularly in 2018. And if consideration of tax rate reductions will be further pushed back, the danger arises that it winds up in 2018. The reason we use the word “danger” reflects the fact that next year congress faces elections. In a political year, elections focus congress and therefore will intensify the debate on tax legislation. Finally, next year’s congressional elections will likely make this year’s goings on in congress look like a honeymoon.
The Flattening Yield Curve
The flattening yield curve continues to grab attention. After the last presidential election, the yield curve spread between 10 year and 3 month treasuries steepened sharply (see graph). Since then, it retraced most of the steepening.
The 10 year spread against the 2 year treasury show a similar flattening but not as severe when compared with the 3 mo-10 yr spread.
Flattening in the first graph likely reflects both the higher fed funds rate and reduced investor optimism for long term growth. The flattening is also a negative for many financial institutions. While there appears little macro economic concern at present from these trends, when these yield curves invert it usually provides a warning for potential economic slowdowns. One caveat, the distortions created by the fed’s quantitative easing policies may mean past economic models will not provide the same clues to future change as they did in the past.
If the economy does show a more sluggish outlook after the first quarter, and the controlling word is “if”, that would result in a shortage of growth. With that as a possiblity, it would lead investors to companies that can show growth in a sluggish economy. If the dollar remains weaker and economies outside the u.s. Demonstrate continued improving growth, then multi-national u.s. Companies should also prove attractive to investors.
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