Fourth Quarter Macroeconomic Update

Inflation-adjusted gross domestic product (GDP) grew at an annualized rate of 1.9% in the fourth quarter of 2016, according to the Bureau of Economic Analysis (BEA), down from 3.5% in the previous quarter. Such growth is primarily a result of positive trends in personal consumption expenditure, private inventory investment, residential and nonresidential investment spending and increases in state and local government spending. However, declines in federal government expenditures and poor export performance limited growth. GDP increased 2.9% in 2016, compared with 3.7% in 2015. Although growth has slowed, consumer spending has continued to exert inflationary pressure, which is likely to support interest rate increases in 2017.

Consumer spending and labor 

The US economy added a total of 227,000 nonfarm jobs in January 2017, according to the Bureau of Labor Statistics. However, amid such job growth, unemployment increased slowly at a rate of 4.8%. This labor force participation rate increased to 62.9%, which in combination with the other jobs data, signals that there is still room for employment growth. In January, private-sector goods-producing jobs grew by 45,000 and service providers gained 192,000 posts; a loss of 10,000 government jobs partially offset these gains. Growth in the professional and business services sectors of the economy were particularly robust, but employment in commodity- and export-based sectors, such as mining and manufacturing, has begun to exhibit slow growth as prices begin to improve. The increase in the unemployment rate and labor force participation rate indicate more slack in labor markets, demonstrated by slow average wages growth of just $0.03 in January 2017, compared with $0.06 in December 2016. Nonetheless, real wages are still up 2.5% from the previous year, which signals that growth is moving forward despite slowed productivity gains. Amid rising incomes, personal consumer expenditure, which accounts for more than two-thirds of all economic activity, grew 2.8% in 2016. This suggests real wage gains are actively translating to increased overall consumer spending, which will support economic sectors that specialize in producing consumer discretionary goods. The upward pressure on wages, coupled with increased spending, signals that inflation is approaching the Federal Reserve’s target of 2.0%. The Personal Consumption Expenditure Inflation Index (PCEPI), the Federal Reserve’s favored measure of inflation, increased 1.6% in 2016. Considering the latest data from January, the PCEPI exhibited a trailing annual increase of 1.9% and is on track for the target. This inflationary pressure is likely to cause the Federal Reserve to institute gradual interest rate increases throughout 2017.


Fixed capital investment (CAPEX) also exhibited signs of growth, albeit still slow in relation to previous levels. According to data from FactSet, total CAPEX grew 1.9% during the third quarter of 2016 (latest data available) to reach $147.5 billion. While this level of investment is down 9.1% from the same period the previous year, the decline is largely attributable to the faltering energy sector. However, when the energy sector is excluded, trailing 12-month investment is up 2.4%. Disaggregating the investment data reveals that the primary drivers of CAPEX are the technology and consumer discretionary sectors, which grew a respective 12.3% and 9.5% in the third quarter. This sector growth suggests that consumer spending has remained strong and continues to be the primary source of economic growth in the current up cycle. CAPEX in the energy sector is down 45.2% from the previous year, causing energy investment to enter its seventh consecutive quarter of decline. Analysts expect this decline to continue through the end of 2016. With the world price of crude oil projected to gain ground in 2017, the massive decline in CAPEX by the energy sector is expected to cease. However, with the price of oil not expected to approach its 2012 peak of $105.00 per barrel, large energy companies are unlikely to completely reverse their cuts to CAPEX in the short run. While price growth is expected, it remains uncertain whether the price of oil will make up enough ground to allow for new investment.

Financial markets and interest rates and trade 

As financial markets performed well overall, business investment activity rebounded in the fourth quarter of 2016 on the back of plans for increased infrastructure spending and corporate tax reform. Initial public offerings (IPO) volume, an indicator of merger and acquisition (M&A) activity, fell a significant 44.8% in 2016, on the heels of political uncertainty and tumultuous global macroeconomic trends over the course of the year. However, IPO volume increased compared with the fourth quarter of 2015, suggesting the pipeline for growth is strong in 2017. Together, these metrics paint a similar story; as real wages start to rise and the US economy appears to have finally escaped the shadow of the Recession, businesses may start to become less skeptical about prospects for growth as new legislation is put forth. Over the early half of 2016, lackluster global economic growth and uncertainty surrounding the US Presidential Election likely contributed to the lack of confidence from US businesses. However, as President Trump’s cabinet and policy agenda start to take shape, business investment may continue to grow over the coming year. Nevertheless, few signs exist that business signal investment is expected to reach its prerecessionary levels anytime soon.

There was substantial movement in both fixed income and equity markets throughout the fourth quarter. The erosion of political uncertainty with the outcome of the election and President Trump’s promise to roll back the Dodd-Frank Wall Street Reform and Consumer Protection Act and a myriad of other regulations fueled a speculative sector rotation by promoting a sell-off in the treasury bonds, which pushed yields upward and drove more investors toward securities markets. As the possibility of less stringent regulation becomes a reality under the Trump Administration, sectors that have seen the largest investment activity increases include financial, healthcare, biotechnology and industrial.

Speculative investment activity, strong economic indicators and an increase in interest rates by the Federal Reserve cumulated in the US dollar increasing strongly over the fourth quarter. Indeed, the US trade-weighted index (TWI), which measures the relative strength of the US dollar against a variety of foreign currencies, increased 5.6% in the fourth quarter. Large increases like these do not bode well for manufacturers moving forward as an appreciating dollar makes US goods relatively more expensive for foreign consumers. However, the TWI did normalize in January 2017, falling slightly after its post-election spike.

Fourth Quarter Macroeconomic Update PDF