Current Market Indications Point to Potentially Robust Economic Growth in 2018

It has been nearly a decade since the end of the Great Recession. After such a lengthy period of recovery, there are now signs that the US economy is finally poised to experience robust growth throughout 2018. Perhaps most importantly, current market trends have economists especially optimistic about the possibility of pervasive growth, with many analysts expecting a significant acceleration in wage gains.

During the long period of economic recovery that began in 2009, the US economy posted an average growth of 2.1 percent, with 2.9 percent (2015) representing the high-water mark. Due to the expectation of continued business investment and rising consumer spending, analysts are projecting a 2.6 percent rate of growth for 2018, an increase of 0.3 percent from the 2017 projection (2.3 percent). Since the 2018 projection was made prior to the passage of tax legislation, it’s reasonable to conclude that the 2.6 percent figure might approach a full 3 percent.

Of course, these projections never rely on any single market indicator, and a number of recent developments have contributed to the optimistic economic projections for the year ahead. Consumer demand for automobiles, combined with continued technological innovation as well as the recent rally in oil production, has been instrumental in the recovery experienced in the manufacturing sector. With the global economy also growing stronger, other sectors in the US have enjoyed significant benefits as well.

These recent domestic and international gains continue to play an important role in the declining unemployment rate in the United States. At 4.1 percent, the nation’s unemployment rate is the lowest posted in the aftermath of the Great Recession, when the unemployment rate reached 10 percent in 2009 (prior to 2009, it hadn’t eclipsed 10 percent since 1983).

Even at the current rate of 4.1 percent, analysts tend to agree that the downward trend will continue in 2018. This is good news for American workers, as employers will be forced to compete for new hires and will likely adopt stronger policies intended to retain current employees. Employers will also have to seriously consider instituting robust training programs to help fill existing vacancies, which will give American workers the opportunity to expand their skill set without investing in potentially costly academic programs or vocational schools.

It’s these conditions — an ever-tightening labor market at a time when companies have immediate and expanding employment needs — that have economists confident that wage growth with finally experience significant gains after stagnating for nearly a decade. According to current projections, analysts are predicting an increase of 2.5 percent for 2018, with gains growing stronger with each passing month until finally exceeding 3 percent at year’s close.

When wage growth rises at a rate approaching 3 percent, it’s only natural to expect a commensurate increase in consumer spending, which is responsible for approximately 70 percent of the US economy. Consumer spending is expected to increase at a rate of 2.5 percent, and business investment is projected to grow at a rate of anywhere from 4.5 percent to 6 percent or more.

The recent tax legislation is expected to further bolster these projections, although it remains possible that the overwhelming majority of corporations will opt to use the tax cuts to increase dividends or buy back stock rather than investing in employees by increasing wages or expanding benefits.

Although the full economic impact of the recently passed tax cut legislation remains to be seen, economists recognize ample reason for optimism about the possibility of economic growth in the year 2018. The most recent projections for economic growth are supported by a number of critical market indicators, including declining unemployment rates, increasing wage gains, and the likelihood of increased business investment, all of which contribute to the growing confidence in the future of the US economy.

Consumer Credit Grows Record 8.5% in August

This month’s Federal Reserve consumer credit release showed that household borrowing had grown at a seasonally adjusted rate of 8.5% in August, the fastest rate in a year, up from 5.9% in July. The surge represented a $25.9 billion rise in total consumer spending to $3.69 trillion, and occurred as demand for everything from cars to education and credit cards picked up.

Revolving credit grew at an annual rate of 7% to $974.6 billion, while non-revolving credit rose 9%, or $20.2 billion, to total $2.71 trillion. Federal government holdings of student loans comprise the greatest share of non-revolving credit, representing a 38% portion of outstanding credit, while depository institutions and financial companies are the second and third largest, respectively.

Greater willingness to borrow on the part of American consumers, with decent consumer balance sheets, points to confidence about future earnings, driven by steady income and job growth. Indeed, the economy added 156,000 new jobs in September, posting another month of steady gains, although the figure was slightly lower than previously forecast. Unemployment grew slightly from 4.9% to 5% as more discouraged workers re-entered the market looking for work, though overall, unemployment claims remained at 40-year lows. Wages also increased 2.6% in September, compared to a year ago, overtaking the inflation rate.

“It turns out that Goldilocks is real: The labor market is not too hot and not too cold,” says Douglas Holtz-Eakin, a former director of the Congressional Budget Office, according to CNN Money.

In combination, job growth, income growth, and increased household borrowing, all suggest that the consumer discretionary sector, including retailers, car manufacturers, and other domestically-oriented consumer industries, may be poised for a moderate recovery. The increases in the stock prices of GM, Ford, and Gap, also support this view.

References:

http://www.acainternational.org/creditors-consumer-borrowing-grows-at-record-pace-in-august-40633.aspx

http://www.bloomberg.com/news/articles/2016-10-07/consumer-borrowing-in-u-s-rises-by-most-in-nearly-a-year

http://money.cnn.com/2016/10/07/news/economy/september-jobs-report-us-economy/

http://bankingjournal.aba.com/2016/10/consumer-credit-grew-8-5-in-august/

http://www.marketwatch.com/story/consumer-credit-surges-85-in-august-2016-10-07?siteid=bnbh

U.S. Consumer Spending Slows in August, Along With Income Growth

U.S. consumer spending in August slowed to the lowest rate in five months, with income, wage, and salary growth also slowing after four strong months. Adjusted for inflation, purchases fell 0.1 percent in August, following 0.3 percent growth in July. Bloomberg notes that while the slowdown is no cause for panic, given that consumer purchases are the engine driving the American economy, their ups and downs are worth following.

Consumption advanced a respectable 0.4 percent in July and 0.3 percent in June, according to the Commerce Department, and remained unchanged, for the first time since January, during the month of August. Early indications of the drop in real spending could be seen in slowing retail sales and flagging demand automobiles.

Personal incomes also grew just 0.2 percent in August, compared to 0.4 percent in July, marking the weakest income growth since February’s 0.1 percent drop. Wages and salaries increased just 0.1 percent in August after back to back months of 0.5 percent growth. Disposable income, or spending money left after taxes, experienced soft growth of 0.1% in August as well.

“It’s not the worst thing ever,” said Tom Simons, a money-market economist for Jefferies LLC to Bloomberg. “The consumer should come off the sidelines a bit more in coming months. Third-quarter consumer spending should be a little more moderate but still strong, reflecting a solid, healthy base.”

On the other hand, an uptick in hiring, cheaper gasoline prices and groceries, low-interest loans and consumer optimism suggest that consumption will deliver moderate, but healthy contributions to economic growth in the coming quarter. Economists are banking on consumption to lift the GDP growth rate to 3 percent in the current July-September performance.

While consumer confidence grew in September, that reading was at odds with the higher 5.7 percent savings rate that Americans charted in August, as higher savings usually indicate consumer anxiety and a conservative outlook on economic prospects.

References:

http://www.bloomberg.com/news/articles/2016-09-30/engine-of-u-s-economy-down-but-far-from-out-as-spending-slows

http://www.bloomberg.com/news/articles/2016-09-30/u-s-consumer-spending-little-changed-in-august-as-incomes-cool

http://www.usatoday.com/story/money/2016/09/30/personal-income-consumer-spending-economy/91313998/

http://www.nasdaq.com/article/us-consumer-spending-flat-in-august–2nd-update-20160930-00542

Tempur Sealy Shares Plunge Following Lower 2016 Sales Guidance

Shares of Tempur Sealy International plummeted by 22% to $57.60 following the dismal sales guidance issued by the company, informing investors to expect a 1% to 3% decrease in net sales for 2016 compared to last year. Tempur Sealy also put its revised EBITDA at between $500 million and $525 million, down from the EBITDA guidance of $525 million to $550 million that it issued earlier this year in July.

“While our net sales are below expectations, our operational initiatives are going well and are continuing to drive considerable margin expansion,” Chief Executive Officer Scott Thompson said in a press release. “We currently expect net sales for the full year to be down 1 to 3 percent as compared to 2015.” Thompson, who was brought on board by activist investor H Partners Management LLC, has been aiming to cut costs and boost profit margins at the company in keeping with his mandate.

While Tempur Sealy has not been forthcoming with reasons for the decreased guidance, one likely culprit is the booming online market for mattress sales by e-retailers such as Casper and Tuft & Needle. These companies represent only $300 million, or 2% of the industry, but have captured 13% of non-innerspring mattress sales, and continue to increase market share rapidly.

Another factor put forth by The Wall Street Journal is that the rebranding efforts of Steinhoff International Holdings have had a detrimental effect on mattress sales. Steinhoff recently acquired Houston-based The Mattress Firm, the largest US specialty mattress retailer, and currently accounts for 25% of Tempur Sealy’s sales.

Tempur Sealy will release its third quarter results on October 27. According to USA Today, analysts surveyed by S&P’s Global Capital Intelligence forecast $834.5 million in revenue for the third quarter, down from $880 million in revenue that the company made during the same quarter in 2015. Analysts are also projecting $3.1 billion in revenue for the full year, down from $3.15 billion in revenue for 2015.

References:

http://www.marketwatch.com/story/tempur-sealy-shares-fall-as-2016-outlook-cut-2016-09-27?siteid=bnbh

http://www.usatoday.com/story/money/2016/09/28/tempur-sealy-stock/91213106/

http://www.cnbc.com/2016/09/28/tempur-sealy-shares-plunge-23-after-dismal-sales-guidance.html

http://www.wsj.com/articles/less-cash-in-the-mattress-at-tempur-sealy-1475084361

http://www.wsj.com/articles/steinhoff-to-buy-mattress-firm-for-2-4-billion-1470599217

Oil Prices Surge Following OPEC Production Cap

Oil prices surged following news that the Organization of Petroleum Exporting Countries had agreed to cut production and cap output. The international oil benchmark Brent crude rose 6% to nearly $49 a barrel on the back of the announcement.

November West Texas Intermediate crude futures jumped 4.7%, or $2.11, to trade at $46.78 a barrel. US stocks also closed higher overall following the surge in oil prices, with the Dow Jones Industrial Average closing up 110.94 points, ExxonMobil Corp. shares jumping 4.40%. Moreover, the S&P 500 index finished up 11.44 points, or 0.5%, at 2,171.37, while the energy sector jumped 4.3%. Oil prices settled up 5.3% at $47.05 on Wednesday.

The energy ministers from the major oil exporting nations struck the deal during talks held in Algeria in order to limit crude production and reduce the oversupply. The formal details of the agreement will be finalized at the OPEC meeting in November.

The deal stipulates a 700,000 barrel reduction of oil output per day overall, though some OPEC nations will cut their production more than others. Iran, for instance, will be allowed to increase its output. Oil production will be limited to a range of 32.5 million to 33 million barrels per day, down from August’s output of 33.2 million barrels.
“Opec made an exceptional decision today,” Iran’s Oil Minister Bijan Zanganeh said, according to the BBC.

Goldman Sachs expressed skepticism that the deal would successfully limit oil production in the long term, in a note that the investment bank circulated to investors. Goldman said that it would not revise its forecasts for WTI at $43 per barrel by the end of this year and $53 a barrel in 2017.

“If this proposed cut is strictly enforced and supports prices, we would expect it to prove self-defeating medium term with a large drilling response around the world,” Goldman’s analysts said.
Goldman also noted that “compliance to quotas is historically poor, especially when oil demand is not weak,” and that other oil exporting nations not beholden to the quota had increased oil production beyond analysts’ expectations.

References:

http://www.cnbc.com/2016/09/28/goldman-sachs-opec-production-cut-deal-doesnt-change-oil-price-forecasts-through-2017.html

http://www.marketwatch.com/story/us-stocks-close-higher-as-oil-jumps-2016-09-28?siteid=bnbh

http://www.marketwatch.com/story/oil-futures-rally-on-report-of-opec-output-cap-agreement-2016-09-28?siteid=bnbh

http://www.bbc.com/news/business-37502538

http://money.cnn.com/2016/09/28/investing/oil-surges-after-opec-informal-meeting/