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Monthly Economic Update: November 2017

November 2017

For the first time since the middle of 2014, the U.S. economy grew by at least 3.0% on an annualized basis for two successive quarters.  Advance estimates for third-quarter gross domestic product (GDP) showed that the economy grew by 3.0% after 3.1% growth (finalized reading) in the second quarter, according to the Commerce Department.

The recent results were buoyed by consumer spending on durable goods, which rose 8.3% at an annual rate, and purchases of equipment by businesses, which increased by 8.6%. Those two components of GDP accelerated at 7.6% and 8.8%, respectively in the second quarter. And, similarly to recent economic reports, exports outpaced imports.

While Hurricanes Harvey, Irma and Maria during the third quarter resulted in near-term effects for the oil & gas sectors, the housing market, and insurers and reinsurers, other areas of the economy were still able to register steady growth. Advance GDP estimates are based on incomplete source data and are subject to revision, the Commerce Department says, and the agency’s “second” estimate for third quarter GDP is slated to be released November 29.

More countries across the globe are recording economic growth, many much earlier in their economic cycles than the U.S. That is helping to underpin positive performance in international as well as domestic stock markets. Commodities markets also continue to recover from the very low levels reached in previous years and are expected to benefit from Chinese production cuts and stable demand being generated elsewhere.

Consumers Favor Current Economic Conditions

Recent U.S. economic data demonstrate a trend toward strong consumer sentiment amid surging U.S. stock markets and home-price appreciation. The Conference Board’s Consumer Confidence Index increased to its highest level in nearly 17 years to 125.9 in October, up from 120.6 the previous month. Confidence remains high, boosted by the job market, which hasn’t received such favorable ratings since the summer of 2001, and the prospect of improving business conditions over the near-term, the Conference Board said.

Similarly, the University of Michigan’s Index of Consumer Sentiment (100.7) remained at its highest monthly level since the start of 2004. The surveys indicate that a number of factors underpin consumers’ assessments—current economic conditions (116.5), and expected economic conditions (90.5),  are up by 4.8 and 6.1, respectively, from the previous month.

Though not anticipating accelerating growth rates, consumers expect a continuation of the current economic expansion at the slower pace of growth that has characterized this recovery. Low unemployment and inflation have made lower income growth rates more acceptable. In addition, the great recession has led to a fundamental shift in assessments of economic risks, with consumers now giving greater preference to economic stability over economic growth, noted Richard Curtin, Surveys of Consumers chief economist.

Manufacturing Conditions Remain Strong

Manufacturing, meanwhile, is contributing more to GDP than in the recent past, a closer look at second-quarter economic data collected from the Bureau of Economic Analysis shows. Real value added by manufacturing, a measure of an industry’s contribution to GDP, increased by 3.2% in the second quarter, following 4.0% in the first quarter. In addition, manufacturing gross output rose to its highest point since the fourth quarter of 2014, according to analysis of the BEA’s data by the National Association of Manufacturers.

Overall, the U.S. manufacturing economy is powering along, helped by technological innovation and a growing trend toward bringing more production back to the states from overseas. The combined trends of reshoring and foreign direct investment in U.S. manufacturing resulted in an estimated net gain of about 27,000 jobs in the U.S. in 2016, the first such gain in decades, according to estimates from the Reshoring Initiative.

Still, it’s estimated the U.S. has lost cumulatively anywhere from 3 to 4 million manufacturing jobs to offshoring. An estimated net 220,000 jobs per year were lost overseas during the 2000-2003 period, according to the Reshoring Initiative. With the 2016 results, though, more than 338,000 manufacturing jobs have been brought back onshore since the employment low in February 2010.

Among the trends driving the reshoring movement are rising wages overseas, anticipation of potential policy changes that will favor U.S. manufacturing competitiveness, and the move toward total cost of ownership – or the gauge of the costs associated with sourcing, making, transporting and storing products along a company’s supply chain.

Recent regional and national benchmarks of demand and output for the country’s manufacturers remain healthy. The MNI Chicago Business Barometer reached its highest level in October (66.2) since March 2011. Backlogs, or unfinished customer orders, partly due to the hurricanes, reached a level not seen in 43 years. Given that the new orders component of the barometer rose to its highest level since June, the order backlogs paint a picture of healthy demand.

In Texas, the state’s manufacturing outlook survey published by the Dallas Federal Reserve reported that its production index rose six points in October to 25.6 from the previous month. That represented the highest reading since April 2014. In New York State, the Empire Manufacturing State Manufacturing Survey’s general business conditions index rose six points to 30.2, its highest level in three years, according to the New York Federal Reserve.

The Institute for Supply Management’s (ISM) purchasing manager’s index, the nation’s broad indicator of manufacturing activity, declined in October by 2.1 percentage points to 58.7. The measure still meant that the manufacturing economy posted its 14th consecutive month of expansion.

Unemployment Rate Lowest Since December 2000

More positive signs that the U.S. economy remains on firm footing were evident in the recent jobs report. Employers added 261,000 jobs in October and the unemployment rate fell to 4.1%, down from 4.8% since the start of the year, according to the Bureau of Labor Statistics.

Employment in food services, restaurants and bars increased sharply, mostly offsetting the decline in September that largely reflected the impact of Hurricanes Harvey and Irma, the BLS said. The leisure and hospitality sector added 106,000 jobs in October after losing 102,000 the previous month. Job gains also occurred in professional and business services, manufacturing, and health care.

The BLS’ broadest measure of underemployment, which includes unemployed, marginally-attached workers, and those employed part-time for economic reasons, fell to 7.9% in October, compared to 9.2% a year ago. That rate, known as U-6, had been as high as 17.1% in April 2010.

Wage growth remains tepid. Average hourly earnings were little changed in October at $26.53 and are up 2.4% compared to a year ago. Other inflation indicators tracked by the Federal Reserve, like the price index for personal consumption expenditures (PCE) remain below the Fed’s 2.0% inflation target. The PCE index, excluding food and energy, rose by 1.3% in September compared to a year ago. Expectations are, however, that the central bank is on course to raise interest rates following the Federal Open Market Committee’s two-day meeting in mid-December.

Beginning in February, Jerome Powell, a member of the Federal Reserve’s board of governors, will be the new Fed chairman. He replaces Janet Yellen, who served as Fed chair since February 2014.

Real Estate: New Home Sales Surge; Existing Sales Market Still Hampered by Supply Shortages

New home sales rose at the fastest pace since January 2007 with strong activity in the South following Hurricanes Harvey and Irma, and solid activity in other regions. New home sales rose 18.9% in September from August’s revised figures to a seasonally-adjusted annual rate of 667,000, according to the Commerce Department. Sales in the South increased by 25.8% from the previous month and were up by 33.3% in the Northeast.

Existing home sales rose 0.7% in September compared to the previous month, to a seasonally-adjusted annual rate of 5.39 million. Home sales in recent months remain at their lowest level of the year, despite considerable buyer interest, said the National Association of Realtors. Total housing inventory at the end of September rose 1.6%, but remains 6.4% lower than a year ago. Inventory has fallen year-over-year for 28 consecutive months.

The trade group also noted that a lack of listings – particularly at the lower end of the market – and rising prices are straining the budgets of potential buyers. This is also at a time when nearly two-thirds of renters believe now is a good time to buy, though affordability and few choices in their price range have made it difficult for first-time buyers to reach the market.

Median existing-home prices for all housing types rose by 4.2% in September compared to a year ago, the NAR said. The S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index, covering all nine U.S. census divisions, posted a 6.1% annual gain in August.

 

 

 

Global Markets: Synchronized Global Growth Benefits Most Stock Benchmarks

European Bonds Steady with ECB Support Into 2018, Chinese Yields Spike

 The steady economic expansion in the U.S. has allowed companies to continue to report moderate earnings increases, while a host of U.S. companies are also benefiting from the uptick in economic growth in Asia and Europe.

As of November 3, 81% of S&P 500 companies had reported earnings. More companies (74%) are reporting earnings per share above estimates compared to the five-year average. In terms of sales, 66% of companies are reporting actual sales above estimates compared to the five-year average. The “blended” earnings growth rate (which combines results for those companies that have reported and estimates for those that have yet to report) is up by 5.9% for the third quarter, according to FactSet.

Earnings growth has helped underpin market gains. The multinational bent of companies in the Dow Jones Industrial Average (DJIA) partly resulted in that index outperforming the broader S&P 500 in October. For the month, the DJIA rose by 4.3%, while the S&P 500 was up 2.2% and the Nasdaq Composite gained 3.6%. The yield on the 10-year Treasury note rose to 2.38% as of October 31, up from 2.33% at the end of September.

 

 

In other markets across the globe, Japan’s TOPIX gained 5.4% in October, and is up on a price basis by 16.3% year-to-date through October 31. Along with select emerging markets and markets in Asia, the TOPIX is among those stock gauges that are performing as strong or stronger than U.S. indexes. The MSCI Asia ex Japan index has risen by about 34.5% this year through October, while the MSCI Emerging Markets index is up by nearly 30.0%.

Japan’s prime minister, Shinzo Abe, secured a strong mandate in elections in late October. His victory has been viewed as a continuation of the current economic landscape. Japan’s economy has grown for six straight quarters, though the second quarter 2017 GDP figure was revised downward to an annualized rate of 2.5%, down from an initial reading of 4.0%.

In Europe, the MSCI Europe ex U.K. index has gained more than 23.5% this year through October. Economic growth continued in the third quarter with seasonally adjusted GDP of 2.5% in the eurozone and the European Union. Recent unemployment rates fell to their lowest levels since 2008 and 2009.  The eurozone’s unemployment rate fell to 8.9% in September compared to 9.9% a year ago – its lowest since January 2009. The unemployment rate for the European Union was 7.5% in September, compared to 8.4% the previous year, and the lowest recorded in the EU since November 2008.

Returns for European government bonds remained steady in October as the European Central Bank announced an extension of the bank’s asset purchase program. The ECB said in late October that it would extend its quantitative easing program through September 2018 “or beyond” if necessary, until it sees a sustained adjustment in the path of inflation consistent with its inflation aim.

The ECB is currently purchasing about €60 billion of government bonds each month and will continue to do so through December to inject liquidity into the region’s money markets. Those monthly purchases will decline to €30 billion beginning in January. The ECB’s statement has led to lower bond yields in the region, though prices on sovereign debt fell in early November on broad-based selling, according to this report.

China’s 19th National Party Congress concluded in late October with one of the takeaways that the country’s leaders will focus on qualitative growth rather than numerical targets, with President Xi Jinping and the government expected to continue to seek GDP growth targets at or above 6% over the next two to three years. Trends that were already in place, such as reducing leverage and overcapacity, and the reform of state-owned enterprises, are also expected to continue.

Following the meeting, yields on 10-year Chinese government bonds reached as high as 3.917%, their highest point in three years. The backup in yields was partly due to sentiment that efforts to rein in excessive risk in the financial system would curb lending, the growth of higher-yielding wealth management products sold by non-banks, and redemptions from investors on these non-bank products.

The government bond rout resulted in the central bank intervening with added liquidity to the markets during a few of the final trading sessions in October. The benchmark Shanghai Composite Index still managed to eke out gains of about 1.3% during October and is up by 9.3% for the year through October.

China’s economy posted annualized growth of 6.8% in the third quarter and 6.9% for the year through September, according to the National Bureau of Statistics of China. The nation’s manufacturing PMI came in at 51.6 for October, a decrease of 0.8 percentage point from the previous month, but in line with the average for the year.

Commodities: Production Cuts in China, Global Growth Forming a Solid Foundation for Prices

Emerging Demand Expected As Battery Technology Evolves for Electric Vehicles

 

Chinese leader Xi’s policy of lower and stable rates of economic growth in the coming years may be a positive for certain commodities, particularly industrial metals. The nation’s economy, a leading force for demand for most industrial metals, helped prices recover in 2016.

Now, with global growth and manufacturing strong, along with supply side reforms occurring in China (shutting down excess capacity and stricter environmental controls), a stable foundation appears to be forming for prices in 2018.

Emerging trends, such as demand for electric vehicles (EVs) is also expected to benefit copper and nickel prices, though battery technology remains in a state of flux. So it’s not yet certain which metals will become the dominant components as demand for EVs grows.

Nickel prices surged in late October to their highest since mid-2015. The price rise came as analysts issued bullish forecasts for nickel, as nickel byproducts are among the key ingredient in lithium-ion batteries. In general, near-term demand for nickel is expected to be generated more by its use in stainless steel production for consumer goods, such as appliances as well as autos and machinery.

Oil prices, meanwhile, rose again this past month, with West Texas Intermediate (WTI) crude up 8.04% in October. In recent weeks, geopolitical tensions in the Middle East have led to higher prices. An example is the anti-corruption purge in Saudi Arabia, where Crown Prince Mohammed bin Salman ordered the detention of dozens of political and business figures in early November.

As of November 8, Brent futures were above $63 a barrel, while WTI futures were trading at nearly $57 a barrel. Brent crude pushed past $60 a barrel for the first time in two years in early November.

Among the recent trends that have supported oil prices has been a deal on production cuts through March 2018 from members of the Organization of the Petroleum Exporting Countries (OPEC) and other non-member countries. OPEC and other countries are expected to meet later this month to discuss an extension of the deal.

In terms of long-term demand, OPEC doesn’t see global demand peaking anytime soon. In its annual World Oil Outlook, OPEC revised long-term oil demand upwards by 1.7 million barrels a day compared to its 2016 forecast. It expects demand to rise by 15.8 million barrels a day to 111.1 million barrels a day in 2040. That compares to 95.4 million barrels a day in 2016.

The near-term direction of prices may be influenced by U.S. production. WTI prices at $50 a barrel are viewed as the break-even price for U.S. shale drillers and could lead to more activity for U.S. production, which recently hit a record high of 9.62 million barrels a day in the week of November 3.

 

 

 

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Citations.

https://www.bea.gov/newsreleases/national/gdp/2017/pdf/gdp3q17_adv.pdf

https://www.conference-board.org/data/consumerconfidence.cfm

http://www.sca.isr.umich.edu/

https://www.bea.gov/newsreleases/industry/gdpindustry/2017/pdf/gdpind217.pdf

http://www.shopfloor.org/2017/11/manufacturing-value-added-output-rose-2-22-trillion-second-quarter-time-high/

http://reshorenow.org/may-15-2017/

https://s3.amazonaws.com/images.chaptermanager.com/chapters/b742ccc3-ff70-8eca-4cf5-ab93a6c8ab97/files/mni-chicago-press-release-2017-10.pdf

https://www.dallasfed.org/research/surveys/tmos/2017/1710.aspx

https://www.newyorkfed.org/medialibrary/media/survey/empire/empire2017/esms_2017_10_survey.pdf?la=en

https://www.instituteforsupplymanagement.org/ISMReport/MfgROB.cfm?SSO=1

https://www.bls.gov/news.release/empsit.nr0.htm

https://www.bea.gov/newsreleases/national/pi/2017/pdf/pi0917.pdf

https://www.census.gov/construction/nrs/pdf/newressales.pdf

https://www.nar.realtor/newsroom/existing-home-sales-inch-07-percent-higher-in-september

https://insight.factset.com/sp-500-earnings-season-update-november-3

https://www.theguardian.com/world/2017/oct/22/shinzo-abe-secures-strong-mandate-in-japans-general-election

https://www.reuters.com/article/us-japan-economy-gdp/japans-second-quarter-economic-growth-revised-down-from-stellar-first-reading-idUSKCN1BI373

http://ec.europa.eu/eurostat/documents/2995521/8357385/2-31102017-BP-EN.pdf/5610b2fd-85a9-48e8-b510-3d87eb73793a

http://ec.europa.eu/eurostat/documents/2995521/8357265/3-31102017-CP-EN.pdf/cc23432e-f918-4f93-9fe7-0c03badb9792

https://www.ecb.europa.eu/press/pr/date/2017/html/ecb.mp171026.en.html

https://www.reuters.com/article/eurozone-bonds/update-1-euro-zone-bond-yields-up-sharply-as-market-fortunes-sour-idUSL8N1NF4IJ

http://www.straitstimes.com/business/economy/how-chinas-party-congress-could-impact-investors

https://www.reuters.com/article/us-china-bonds/china-central-bank-tries-to-calm-nervous-bond-market-as-risks-loom-idUSKBN1D02KL

http://www.stats.gov.cn/english/PressRelease/201710/t20171023_1545167.html

http://www.stats.gov.cn/english/PressRelease/201710/t20171031_1548112.html

https://www.bloomberg.com/news/articles/2017-10-31/nickel-touches-two-year-high-as-electric-car-boom-fuels-bets

http://www.opec.org/opec_web/en/press_room/4606.htm

https://www.cnbc.com/2017/11/08/boom-weekly-u-s-crude-oil-production-hits-an-all-time-high.html

Sources for Data for Stock Returns and Bonds

DJIA:

http://bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=12%2F30%2F16&x=34&y=23                                                                                                                                                                                                                                       

http://bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=10%2F31%2F12&x=18&y=23                                                                                                                                                                                                                                       

http://bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=10%2F31%2F07&x=48&y=18                                                                                                                                                                                                                                       

http://bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=10%2F31%2F17&x=24&y=20                                                                                                                                                                                                                                                               

http://bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=10%2F31%2F16&x=30&y=19 

http://bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=9%2F29%2F17&x=34&y=24 

S&P 500:

http://bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=12%2F30%2F16&x=27&y=25                                                                                                                                         

http://bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=10%2F31%2F07&x=23&y=24                                                                                                                                                                                                                                         

http://bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=10%2F31%2F12&x=46&y=20                                                                                                                                                                                                                                         

http://bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=10%2F31%2F17&x=26&y=23                                           

http://bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=10%2F31%2F16&x=23&y=28 

http://bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=9%2F29%2F17&x=18&y=23 

NASDAQ:

http://bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=12%2F30%2F16&x=43&y=24                                                                                                                                                                                                                                   

http://bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=10%2F31%2F07&x=35&y=26                                                                                                                                                                                                                                   

http://bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=10%2F31%2F12&x=42&y=20                                                                                                                                                                                                                                   

http://bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=10%2F31%2F17&x=26&y=22                                     

http://bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=10%2F31%2F16&x=22&y=23 

http://bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=9%2F29%2F17&x=18&y=20 

10-Year TIPS:

https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyieldYear&year=2017                                                                                                                                                                                                                                            

https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyieldYear&year=2016                                                                                                                                                                                                                                            

https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyieldYear&year=2012                                                                                                                                                                                                                                            

https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyieldYear&year=2007                                                                                                                                                                    

TOPIX:

https://www.bloomberg.com/quote/TPX:IND

MSCI:

https://www.msci.com/end-of-day-data-regional

Shanghai Composite Index:

http://bigcharts.marketwatch.com/historical/default.asp?symb=SHCOMP&closeDate=12%2F30%2F16&x=27&y=26 

http://bigcharts.marketwatch.com/historical/default.asp?symb=SHCOMP&closeDate=9%2F29%2F17&x=30&y=24          

http://bigcharts.marketwatch.com/historical/default.asp?symb=SHCOMP&closeDate=10%2F31%2F17&x=22&y=27

Securities offered through World Equity Group, Inc. Member FINRA/SIPC. Advisory Service offered through BCJ Capital Management. World Equity Group, Inc. and BCJ Capital Management are independently owned and operated. BCJ Capital Management is a (SEC) registered investment adviser. Information presented is for educational purposes only. It should not be considered specific investment advice, does not take into consideration your specific situation, and does not intend to make an offer or solicitation for the sale or purchase of any securities or investment strategies. Investments involve risk and are not guaranteed. Be sure to consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Content should not be regarded as a complete analysis of the subjects discussed. Although we believe the content is reliable, it is not guaranteed as to accuracy and does not purport to be complete nor is it intended to be the primary basis for investment decisions. All expressions of opinion reflect the judgment of the authors on the date of publication and are subject to change. Content should not be viewed as personalized investment advice nor should it be construed as an offer to buy or sell, or a solicitation of any offer to buy or sell the securities mentioned herein. Securities mentioned in the commentary do not represent past specific recommendations. BCJ FG 17-594

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