October 2017 Market Update

For the first time in three years, the U.S. economy has recorded growth of at least 3 percent in back-to-back quarters.

The economy expanded at an annualized rate of 3 percent during the third quarter, according to the Bureau of Economic Analysis (BEA), nearly the same as its Q2 growth of 3.1 percent. The strong performance from July to September occurred despite the disruptions caused by Hurricanes Harvey and Irma.

Consumer spending, which accounts for 70 percent of the nation’s economic activity, grew by 2.4 percent during the third quarter. Though this was down from the 3.3 percent of Q2, it was still enough to contribute 1.6 percentage points of the 3 percent growth. Spending was especially strong in September, increasing by a non-annualized rate of 1 percent from August, the biggest jump in eight years, according to the BEA. Much of this, though, appeared to be related to consumers replacing flood-damaged cars in Texas and Florida.

The Conference Board’s Consumer Confidence Index reached its highest point of the 21st century, hitting 125.9 in October, a 5.3 point increase from September. (The index’s baseline is 100 in 1985.) The last time the index was higher was in December 2000, when it was at 128.6.

“Confidence remains high among consumers, and their expectations suggest the economy will continue expanding at a solid pace for the remainder of the year,” The Conference Board’s director of economic indicators said.

The University of Michigan’s Index of Consumer Sentiment similarly rose more than 5 points from September to October, reaching 100.7, its highest level since early 2004.

“Lingering doubts about the near term strength of the national economy were dispelled as more than half of all respondents expected good times during the year ahead and anticipated the expansion to continue uninterrupted over the next five years,” university researchers said. “To be sure, consumers do not anticipate accelerating growth rates but rather a continuation of the slower pace of growth that has characterized this recovery.”

Confidence in the manufacturing sector is also strong, though the Institute for Supply Management’s Purchasing Managers Index slipped from a 13-hear high of 60.8 in September to 58.7 in October. (Any rating above 50 indicates expansion in the sector.) In its survey of representatives of 18 manufacturing industries, the institute found that 16 reported growth.

“Comments from the panel reflect expanding business conditions, with new orders, production, employment, order backlogs and export orders all continuing to grow in October, supplier deliveries continuing to slow (improving) and inventories contracting during the period,” the institute stated. “Prices continue to remain under pressure.”

That confidence appears to be translating into hiring, as 261,000 jobs were added to the economy in October, pushing the unemployment rate down to 4.1 percent, its lowest level since February 2001, the Bureau of Labor Statistics (BLS) reported.

“Employment in food services and drinking places increased sharply, mostly offsetting a decline in September that largely reflected the impact of Hurricanes Irma and Harvey,” BLS stated. “In October, job gains also occurred in professional and business services, manufacturing, and health care.”

Confidence can also be seen in the stock markets, with the Dow Jones Industrial Average hitting a record high of 23,434.19 on Oct. 27 before slipping a few points to close the month at 23,377.24. The S&P 500 Index also set a record on Oct. 27 – 2,581.07 – and it ended October at 2,575.26.

The Federal Reserve Federal Open Market Committee left interest rates unchanged during its Oct. 31-Nov. 1 meeting, observing that, “the labor market has continued to strengthen and … economic activity has been rising at a solid rate despite hurricane-related disruptions.” Many analysts expect the Fed to raise rates at its Dec. 12-13 meeting. If it does so, it would be the third increase of 2017.

President Donald Trump announced in October that he is appointing Jerome Powell to take over as chairman of the Fed when Janet Yellen’s term expires in February. (Trump could have chosen to reappoint Yellen.) Powell, who already serves on the Federal Reserve Board of Governors, must be confirmed by the Senate before becoming chairman. Powell previously was an investment banker and a partner at the private equity firm, The Carlyle Group. He also served in the Treasury Department under President George H.W. Bush.

Trump said that Powell would provide “strong, sound and steady leadership at the Federal Reserve.” Powell is generally expected to continue the approach taken by Janet Yellen of gradually returning interest rates to normal levels.

Housing starts in September fell 4.7 percent from August, though they were 6.1 percent higher than in September 2016, according to the Census Bureau and the Department of Housing and Urban Development. Existing home sales rose in September for the first time in three months, increasing 0.7 percent, the National Association of Realtors reported.

“Home sales in recent months remain at their lowest level of the year and are unable to break through, despite considerable buyer interest in most parts of the country,” the association’s chief economist said. “Realtors this fall continue to say the primary impediments stifling sales growth are the same as they have been all year: not enough listings – especially at the lower end of the market – and fast-rising prices that are straining the budgets of prospective buyers.”

The dollar remained strong in October and, at the end of the month, was trading at 0.86 euros, 0.75 pounds, 113.62 yen and 6.63 yuan.

Trump said during his campaign that he wanted growth of at least 3 percent during his administration. (He even mentioned 4 percent on several occasions, though few people considered that a realistic possibility.) During his first two full quarters in office, he has reached that goal, and with consumer confidence at post-Great Recession highs, that trend may continue. The blog FiveThirtyEight.com recently noted how unusual it is for him to have decent approval ratings on economic matters while being deeply unpopular overall: “Trump’s popularity is vastly lower than we would expect given how Americans view him on the economy.” The president may seek to win some hearts and minds with tax cuts, but the tax reform package developed by Republicans is far from a sure thing, and Trump’s unpopularity is unlikely to help him and GOP leaders in Congress win votes. Trump often returns to the populist themes that got him elected when he is stymied on policy, and that raises the risk that he will seek to connect with large swaths of middle-class Americans by renewing his support for imposing new restrictions on steel imports. This, though, would be cynically short-sighted, in that, in the long term, it would drive up costs and damage the economy for all of those people wearing “Make America Great Again” hats, as well as everybody else. What is popular is not necessarily the same as what is wise. Trump could best help the country – and his own approval ratings – by trying to embrace more of the latter and less of the former.

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