Outlook and Market Review - First Quarter 2017

PDF File: 


The Bureau of Economic Analysis announced a revised first quarter GDP annual growth rate of 1.2% compared to the initial report of 0.7%. The U.S. economy expanded only 1.6% in 2016, which was below the low 2.1% average annual pace since the Great Recession. Consumer spending, which normally is the strongest component of growth, contributed only 0.44% to growth in the first quarter. Fixed investment, which has been slow, added 1.85% to growth. In contrast to weak GDP growth, the unemployment rate fell to 4.3% in May. Many economists are calling this full employment but it is more likely that the labor market is out of step with the rest of the economy. Industrial capacity utilization is 3.2% below the long run average and earnings growth of 2.5% in May was barely above inflation. The Labor Force Participation rate of 62.7% is near an all-time low. Full employment is also inconsistent with the year over year 1.5% inflation rate in May, measured by the core personal consumption expenditure (PCE) index. Nevertheless, even with low growth rates and industrial slack, the Federal Reserve is likely to increase the Federal Fund rate by another 25 basis points in June as a preemptive move against inflation.