Economic news: The U.S. economy is mostly good and appears to be steadily improving
WASHINGTON, March 1, 2018: The U.S. Commerce Department just released figures showing incomes and spending levels for January. Most of the economic news was very positive. But there are some signs that could prove worrisome.
The best economic news: U.S. personal income increased by 0.4% in January. But because of the recently passed tax cut, disposable income (income after paying taxes) increased by a whopping 0.9%. That translates into about a 10% annual increase. Since most consumers end up spending most of their disposable income, the consumption portion of GDP (about 70% of the total) should increase significantly in the coming months.
Since the increase in consumption was so strong in October (0.4%), November (0.9%) and December (0.4%), consumers took a break in January. That resulted in consumption increasing by only 0.2%.
Great economic news: consumer confidence is sky high.
Even better economic news: The tax cuts stemming from December’s GOP tax legislation will continue to provide more money for consumers to spend for the rest of 2018. That, coupled with record high consumer confidence, means that consumer spending should lead the economy to higher growth rates. Not surprisingly, consumer confidence currently stands at its highest level since November 2000.
This high confidence level is fueled by optimism about employment prospects along with generally more positive consumer expectations. Also, consumers feel wealthier, since their retirement plans have gained much value in the past year.
“With consumer confidence elevated and disposable incomes rising, we don’t expect the softness in spending to last long,” noted Paul Ashworth, chief U.S. economist at Capital Economics.
Inflation could be a problem.
For bearish investors, some of today’s economic news was a bit disconcerting. The core inflation rate which excludes volatile food and energy prices rose by 0.3% in January. That translates into about a 3.5% annual rate, which exceeds the target of government policymakers. But this was only one month. Prices in January were only about 1.7% higher than they were last January. Still, this could turn into a problem later in the year.
Most of the upward pressure on prices is due to increasing wages. But the wage increase is not likely to push up future prices. Jerome Powell, the new Chair of the Federal Reserve recently stated,
“We don’t see any strong evidence yet of a decisive move up in wages. We see wages by a couple of measures trending up a little bit, but most of them continuing to grow at two and a half percent,” he said. “Nothing is suggesting to me that wage inflation is at a point of accelerating. I would expect that some continued strengthening in the labor market can take place without causing inflation.”
The manufacturing sector is very strong.
In February, U.S. factories expanded at the fastest rate since May 2004. The Factory Index climbed to 65.4 from the 64.2 from the previous month. (Any reading above 50 indicates expansion.) Also, the index of order backlogs increased, meaning that future manufacturing should continue to grow.
It also appears that fewer factories are slowing production. This is noted by the continued decline in initial jobless claims. In January that number fell to 210,000, the lowest number since December 1969.
While the increased manufacturing activity is welcomed, the imposition of tariffs on some foreign goods to help increase domestic production may not be a good idea. President Trump just announced that he is placing a 25% tariff on imported steel and a 15% tariff on imported aluminum, and U.S. stocks responded badly in Thursday trading action.
Trump claims that foreign manufacturers are, in effect, subsidizing those products to the point where the selling price is much below the actual cost of production for U.S. manufacturers in the same sectors. The new tariffs will raise the price of the imports, allowing U.S. producers to compete.
It also means that purchasers of aluminum and steel, like automakers, will have to pay more for these materials. They will, therefore, have to raise the price of their products to consumers. In turn, this means consumers will pay more for autos and trucks as well as major appliances. For that reason, such tariffs do generally contribute to inflation.
The overall economic outlook remains strong.
In summary, recently released economic news from the Federal government indicates that the U.S. economy is still strong and will continue to grow at a faster rate than in the past. Most economists forecast economic growth to be about 3% this year. But some factors indicate that growth could prove to be much higher, perhaps in the neighborhood of 4 ½% to 5%.
That would mean America will make a dramatic return to real economic prosperity, a rising tide that lifts all boats. It’s something we haven’t seen since 2000.