Under the Hood of a Lackluster GDP Report
Consumers took a “wait and see” attitude in the first quarter of 2017 amid fiscal policy and geopolitical uncertainty. GDP came in at a lackluster 0.7 percent which was lower than Street estimates even after multiple downward revisions throughout the first quarter.
The story continues to be the struggle between the hard and soft data gathered since election time. Inconsistencies between the supposedly more bullish consumer and business communities versus the actual dollars and cents they are spending are plaguing the accuracy of economist reports. It makes it impossible to predict whether this economy is peaking or just getting revved up.
While spending turned in some of the weakest numbers since coming out of the financial crisis, the employment numbers came in hot. US employment costs rose the most since 2007 and wages are now rising at an annualized clip over three percent.
We believe this could be an inflection point for the economy as business costs are rising as they fight for labor in an extremely tight labor market. But it remains to be seen if higher wages and compensation will eventually run through the economy and lead to higher spending.
One thing that surprised us was the pickup in business investment despite the uncertainty in the future of business policies that the Trump administration is targeting. That’s a great sign because if the environment improves, which we think it will, more investment will follow. It definitely shows a pent-up demand and willingness to invest, even in the face of a murky future.
Everything continues to point to continued acceleration in wage growth. This typically trumps all when the eventual dollars flow through the economic system. We believe this will result in a pickup in spending and the weak number is more likely a pause than a continued slowdown.
We believe this also gives the Fed the green light to continue hiking rates and odds should rise to a near certainty for June. They simply cannot hold off into such strong labor numbers.
The fact the Fed can no longer hold off on rate hikes really raises the stakes for the overall economy because we now have zero room for negative downturns. We really need these consumers to step up and start spending their higher wages and we really need some of this soft data to come to fruition.
Brett Ewing is chief market strategist at First Franklin Financial Services.