Confidence Is the Key

If economic performance reflected ebullient consumer and business sentiment, the U.S. economy would be in a historic boom. A recent National Federation of Independent Business Small Business Economic Trends article indicates that business confidence is only as high as it is presently 3 percent of the time. According to NFIB, the “Small-business owners remain optimistic about the future of the economy and the direction of consumer confidence. We are encouraged by signs that optimism is translated into economic activity, such as capital investment and job creation.”

Without question, the job market remains strong. The nation added 138,000 net new jobs in May, following 211,000 jobs in April, conclusively indicating that March’s poor numbers were a weather-induced fluke. Unemployment is at 4.3 percent, the lowest rate since May 2001. Despite a divided American electorate, the Consumer Confidence Index has recently been at levels last observed in December 2000, which represented the tail end of the tech boom-led recovery that began in 1991.

Ethusiasm’s Source

Many observers may be confused by this ebullience. After all, during the first quarter, the U.S. economy expanded just 1.2 percent on an annualized basis, according to Bureau of Economic Analysis data. Consumer spending was weak, with personal consumption’s contribution to GDP growth smaller than it had been for many quarters. Export growth is challenging in the context of modest global economic growth and a strong dollar. There are also indications of difficulties in the U.S. auto sector, as many households already purchased a vehicle this cycle and many automobiles in decent shape are coming off of leases.

Implementation of major portions of the president’s pro-growth agenda remains elusive, including promised corporate tax cuts, personal income tax simplification and an infrastructure-led stimulus package. 

Despite it all, asset prices are rising, employment is expanding and there are indications business investment will expand. Those who control large sums of capital seem confident the president’s pro-business agenda will be sufficiently implemented to allow faster growth going forward.

Positive and Negative

Despite anticipation of the Federal Reserve raising rates again and that faster growth is on its way, the 15- and 30-year fixed mortgage rates have hardly budged. The result is a perfect recipe for home price appreciation, with dwindling inventory meeting a growing number of households able to leverage low rates.

The U.S. economy should see decent growth in 2017. Tax cuts or the belief that they are on the way has stimulated confidence, and consumer and business spending will likely pick up. Data on U.S. job openings suggest that job growth will be enough to move the nation towards full employment.

This is both a blessing and a curse. As of May, the United States had added net jobs in 80 consecutive months, by far the longest streak on record. Wage pressures are building along with other sources of inflation like the cost of housing. This could translate into rising interest rates, which could not only interrupt current housing market momentum, but also negatively impact the values of stocks and bonds. Of course, experts have been detailing this for years only to be puzzled at stubbornly low interest rates and the meteoric rise in asset prices.

There are also geopolitical risks, though financial markets do not appear to be unduly concerned with these presently. The most likely scenario is that the U.S. economy will continue to expand in 2017, jobs will continue to be created, and interest rates will rise, but not by enough to completely undermine current housing market momentum or momentum in the broader economy.

Anirban Basu, Ph.D., is chairman and CEO of Sage Policy Group, Baltimore.