Outlook and Market Review - Fourth Quarter 2016


The economy continues to expand at a very slow pace. The revised fourth quarter real GDP growth was 1.9%, the same as the initial estimate. For all of 2016 the real GDP growth rate was 1.7%. Job creation remains strong but an increase in the labor force participation rate to 62.9% was largely responsible for a higher unemployment rate of 4.8% in January. As wages slowly begin to improve in 2017, more workers will seek jobs making it harder to achieve lower unemployment rates. Capacity utilization remains about 5% below the full employment threshold suggesting low inflation pressure from bottlenecks and supply constraints. Global competition and a strong dollar are keeping import prices low, offering additional relief from inflation pressures. The consumer price index (CPI) all-items index increased 2.1% in 2016 and the personal consumption expenditure index (PCE) all-items index increased only 1.6% for the year. Pressure on the Fed to raise rates now is low since inflation is below the 2% PCE target and the economy is not yet at full employment. Nevertheless, it is possible that the Fed sees the economy on a path to exceed these targets later in the year, especially if infrastructure spending, tax reform, deregulation, and the surrounding elements of a pro-growth strategy come to fruition. A preemptive move by the Fed is likely in June with a modest 25 basis point increase.