All three indexes recorded gains for the month of December as well as for the full year, as the DOW flirted with 20,000 throughout December. The DOW closed out the year at 19,763, gaining 639 points for the month and 13.5% for the year, the NASDAQ closed at 5,383, up 59 points for the month and 7.5% for the year and the S&P, the index most closely followed by economists, closed at 2,239, up 40 points for the month and 9.4% for the year.
CONSUMER CONFIDENCE RISES TO 113.7
The New-York based Conference Board’s Consumer Confidence Index rose to 113.7 in December after jumping to an upwardly revised 109.4 in November. The Present Situation Index dropped to 126.1 from an upwardly revised 132 in November. The Expectations Index rose sharply to 105.5 from an upwardly revised 94.4. The big increase in Expectations was responsible for the overall increase in the Index, as consumers’ view of the current situation deteriorated somewhat. The Conference Board said that the post-election surge in optimism was most pronounced among older consumers. Wells Fargo noted that the overall level of confidence is at a level typically seen near the peak of business cycles. Economists say a level of 90 indicates that the economy is on solid footing and a level of 100 or more indicates growth. Analysts caution that the real driver behind consumer spending is income growth and that labor market trends are a more accurate predictor of consumer behavior.
CONSUMER SPENDING RISES 0.2%
Consumer spending rose 0.2% in November after rising an upwardly revised 0.4% in October. It was the weakest showing since a 0.1% increase in August. Core consumer spending, which is adjusted for inflation, increased 0.1% in November after rising by the same percentage in October. Household income failed to rise for the first time in nine months, suggesting that the economy slowed in the fourth quarter. Economists say the moderation in consumer spending is likely to be temporary, and expect economic growth to accelerate in 2017. The personal consumption expenditures (PCE) price index was unchanged in November after edging up 0.1% in October. The core PCE price index fell to 1.6% from 1.8% in October. In the 12 months through November the PCE price index rose to 1.6%, the biggest year-over-year gain since October 2014. Consumer spending is closely watched by economists because it accounts for 70% of U.S. economic activity.
CONSUMER PRICES RISE 0.2%
The Consumer Price Index (CPI) rose 0.2% in November after rising 0.4% in October and was up 1.6% from October 2015. Core prices, which strip out volatile food and energy costs, also rose 0.2% in November after rising 0.1% in October and were up 2.1% from November 2015. Core inflation has been in a range between 2.1% and 2.3% since December of last year. Prices rose for gasoline, rent and used cars, but fell for groceries and clothing.
UNEMPLOYMENT RISES TO 4.7%
The unemployment rate ticked up to 4.7% in December from a nine-year low of 4.6% in November as more people entered the labor force, which is viewed as a sign of confidence in the jobs market. The economy added 156,000 jobs in December and October and November's data was revised to show 19,000 more jobs added than previously reported. Job growth for December was below economists' expectations. The economy created a total of 2.16 million jobs in 2016. Average hourly earnings increased 10 cents or 0.4% after slipping 0.1% in November. Average hourly earnings over the past 12 months were up 2.9%, the largest increase since June 2009, and up from 2.5% in November. Employment growth in 2016 averaged 180,000 jobs per month, down from an average gain of 229,000 per month in 2015. The slowdown in job growth is consistent with a labor market that is statistically near full employment. There has been an increase in employers saying they cannot fill vacant positions because they cannot find qualified workers. The worker shortage in construction has been growing over the past year. December's job gains were broad, with manufacturing payrolls rising 17,000 after declining for four straight months. Construction payrolls fell 3,000 in December after three consecutive months of increases. Retail sector employment rose 6,300 after increasing 19,500 in November. Government employment increased 12,000 in December.
DURABLE GOODS ORDERS FALL 4.6%
Durable goods orders fell 4.6% in November; economists had been expecting a decline of 4.8%. Orders excluding transportation, which can be a highly volatile category, rose 0.5%, which beat economists’ expectations. Capital goods orders for nondefense items excluding aircraft, which is seen as a proxy for business spending, increased by 0.9%, more than twice the growth that was expected. Shipments of non-defense capital goods excluding aircraft, which are used in the calculation of GDP, rose 0.2% in November after falling 0.3% in October. The durable goods report is often both volatile and subject to sharp revisions.
CHICAGO PMI FALLS TO 54.6
The Chicago PMI fell 3.0 points to 54.6 in December after rising to 57.6 in November. It was the lowest level for the index since January 2015. However, the PMI averaged 54.3 in the fourth quarter, the highest in two years. The December decline was led by a slowdown in New Orders, which fell 6.7 points to 56.5. Production fell to its lowest level since October, and Order Backlogs fell back into contraction. Prices Paid rose 1.2 points to 58.0 in December, the indicator’s second highest reading of 2016. Panelists reported that the prices of metals, plastics and transportation costs were all increasing. The special question asked of the panel in November was how they expected the new administration’s policies to impact their business in 2017. More than half expected their business to prosper, citing anticipated tax reforms and deregulation. Most respondents remained upbeat heading into the new year. The December reading marked the seventh month of expansionary business activity in the U.S.
WHOLESALE PRICES RISE 0.4%
The Producer Price Index (PPI) rose 0.4% in November, much more than the forecast of a 0.1% increase and the largest gain since June. Wholesale prices rose 1.3% during the 12 months through November, the biggest gain posted since November 2014. Core PPI, which strips out the volatile food and energy categories as well as trade services, rose 0.2% for the month and was up 1.8% year-over-year. The report added to other signals that inflation is firming up as Americans pay more for housing and medical care. The PPI for inputs to construction fell 0.3% in November but was up 0.8% from November 2015.
Q3 GDP RISES 3.5%
GDP rose 3.5% in the third quarter, up from the second reading of 3.2% and the fastest pace in two years. GDP increased just 1.4% in the second quarter. The third and final estimate of GDP is based on more complete source data than was available earlier. Nonresidential fixed investment, personal consumption expenditures (PCE), and state and local government spending increased more than previously estimated. Residential fixed investment subtracted from GDP. Consumer spending grew at a 3% annual rate, up from the 2.8% pace estimated previously. The overall picture of economic growth remains the same. Real gross domestic income increased 4.8% in the third quarter after rising just 0.7% in the second. Growth for the entire year is likely to be around 1.5%, which would be the weakest performance since the economy shrank 2.8% in 2009 at the depths of the Great Recession. The economy has not grown more than 3% since 2005. The nonpartisan Congressional Budget Office projects GDP will grow about 2% annually through 2026. The Atlanta Fed, which produces the GDP Now forecast, downgraded its view for fourth quarter GDP, lowering it to 2.4% from 2.6% first forecast after retail sales were weaker than expected.
JOB OPENINGS SLIP 1.8%
Job openings slipped 1.8% to 5.5 million in October, according to the Labor Department’s monthly Job Openings and Labor Turnover Survey, or JOLTS. Hiring also fell to just under 5.1 million, while the number of people quitting declined by 66,000 to about 3 million. The quit rate has stubbornly remained at 2.1% for five consecutive months. Quits are typically voluntary separations, and an increase in quits generally indicates that people are more confident about their ability to find another job. Layoffs remained exceptionally low. Wells Fargo says that in a tight labor market with slow productivity growth, employers would seem to be trying to hold on to existing workers. Although job growth picked up in the third quarter, hiring is expected to continue at a moderate pace in the coming months. The JOLTS report is one of Fed Chair Janet Yellen’s preferred economic indicators.
FED RAISES INTEREST RATES
The Federal Reserve raised interest rates by 0.25% at their meeting in December. The increase was widely expected. Fed Chairman Janet Yellen said the increase was a reflection of the confidence they have in the progress the economy has already made as well as confidence that progress will continue and the economy will continue to strengthen. The Federal Reserve also increased their outlook on the number of interest rate hikes anticipated for 2017 from two to three, although Yellen stressed that the pace of those rate increases would be moderate and that the Fed expects only moderate economic growth of 2.1% for 2017, with unemployment at 4.5% and core inflation rising to 1.9%. Some analysts viewed the Fed’s plans for a possible three rate increases as too aggressive based on their growth projections.
NABE ECONOMIC FORECAST
The U.S. economy will grow 2.2% in 2017, according to economists surveyed by the National Association for Business Economics. Those surveyed also predicted a 4.7% unemployment rate and an increase of 2.3% for consumer prices. While an improvement over this year's expected anemic growth of 1.6%, that's still slow by historical standards. GDP Annual Growth Rate (AGR) in the United States averaged 3.2% from 1948 until 2016, reaching an all-time high of 13.4% in the fourth quarter of 1950 and a record low of -4.10% in the second quarter of 2009, according to the Congressional Research Service. But the business economists say Americans should get used to slower growth being the new normal. A full 80% of those surveyed believe the potential growth rate of the American economy will remain at 2.5% or lower over the next five years. Still, the economists see the risk of a recession as remote; 90% expect the current economic expansion to continue until at least 2018. They expect employers to add an average 168,000 jobs a month in 2017, down from 180,000 a month to date in 2016. Two-fifths of the economists say increased spending on roads, bridges and other infrastructure projects would be the best way to boost economic growth over the next four years; 36% chose tax reform, which usually includes reducing the high official U.S. corporate tax rate in exchange for closing tax loopholes. The association surveyed 52 professional economists between the end of October and mid-November. Those who responded before the presidential election were allowed to send in new estimates after Trump's unexpected win.
KIPLINGER INFLATION FORECAST
Kiplinger expects inflation to rise to 2.5% by the end of 2017, up from 2.0% at the end of 2016. Core inflation, which excludes the volatile food and energy categories, is expected to end 2017 at 2.3%, up just slightly from the 2.2% they expect for 2016. Despite the Fed’s projections of three rate increases in 2017, Kiplinger expects the Fed to raise rates just twice during the year, with a quarter-point increase each time. Rising costs for health care, dining out, health insurance and shelter are expected to contribute to the increase in inflation.
Financial analysts are rewriting their expectations for 2017 and beyond, saying everything changed with Donald Trump’s unexpected victory. In general, economists are expecting more robust growth under the Trump administration and a Congress with a Republican majority in both the House and the Senate, which is expected to end years of legislative gridlock. Trump’s disdain for red tape and cumbersome regulations is generally viewed favorably by business leaders, less so by environmentalists. His tax plans would slash the corporate tax rate and do away with regulations businesses say make it hard for them to grow. Trump also plans to spend $1 trillion over ten years to rebuild the nation’s crumbling infrastructure.
TOP TECH LEADERS MEET WITH TRUMP
President-elect Donald Trump met with technology industry leaders to discuss jobs, immigration and China, as well as internet security and regulation. Trump tried to strike a conciliatory tone, and assured the tech companies that he wanted them to succeed and would make fair trade deals that would make it easier for them to trade across borders. Apple, Alphabet (Google’s parent company), Microsoft, Amazon and Facebook are five of the seven most valuable companies in the U.S., yet they employ fewer people than big firms in other industries, and many employees work abroad. The five together employ about 600,000 people worldwide; Walmart Stores employs 1.5 million people in the U.S. alone. Trump has made it clear he wants there to be “consequences” for U.S. companies that move jobs overseas, which has many tech giants very nervous. Tech execs uniformly opposed Trump during the campaign, and many openly supported Hillary Clinton.
CEOS ADVISE ON JOB CREATION
President-elect Donald Trump announced the creation of an economic advisory council filled with heads of major corporations, including Walmart CEO Doug McMillon, as well as the CEOs of Walt Disney, IBM, General Motors and Blackstone. Trump says his administration is committed to drawing on private sector expertise and cutting government red tape.
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