Economic Update – January/February 2018

Since our last update in December data points related to the economy remain positive overall.

Employment and GDP Gains Continue Momentum…

In January the economy added 200,000 new jobs following up the 148,000 jobs added in December.  The unemployment rate remained at 4.1% for the fourth consecutive month.  The first estimate of GDP in the fourth quarter of 2017 was 2.6%, down from 3.2% in the third quarter, a mild disappointment as expectations in December were for growth of over 3.0%.  However, within the fourth quarter GDP figure consumer spending grew at 3.8% which was the fastest rate of growth since 2014.

…Passage of Tax Reform Will Result in More Money in Consumer’s Pockets…

At the end of December tax reform was signed into law by President Trump.  The tax reform will result in lower individual and business tax rates beginning in 2018.  Most individuals and married couples will see their 2018 tax rates reduced 3% to 4% compared to 2017.  The IRS instructed employers to begin using the updated withholding rates no later than February 15th.   As a result, many employees will begin to see increases in their paychecks beginning in February.

Wages and Inflation Increase…

In addition to the reduced tax benefit employees are now beginning to enjoy there are some signs that the wage stagnation over the past several years is abating.  In the January jobs report the Labor Department reported that workers saw an average hourly earnings increase of 2.9% compared to January 2017.  That is the largest year-over-year increase since June 2009.

If wages continue to increase this year it should contribute to higher inflation in 2018.  The Consumer Price Index (CPI) data released earlier in February showed a rise of 2.1% for January but was up 0.5% compared to December which was higher than expected.

…Likely to Result in Higher Interest Rates Throughout 2018

With an economy on seemingly solid footing with low unemployment rates, rising wages and inflation it is widely expected that the Fed will look to raise short term interest rates in March.  In December Fed officials indicated that their currently plan is to increase interest rates by a quarter point three times in 2018.

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