Economic Update - J.P. Morgan Asset Management
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Economic Update

Contributor Dr. David Kelly

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Growth Icon (Grey)  Growth

Economic growth in 3Q17 was revised upward in the second estimate, hitting an annualized rate of 3.3% and registering the fastest growth rate since 2014. Consumer spending was revised down slightly to 2.3% from 2.4% in the quarter, a solid pace despite likely being suppressed by the recent hurricanes. Equipment spending was the bright spot in the revision, improving to 10.4% from 8.6%, indicating that businesses continue to increase capex spending. Inventories and net exports were both revised slightly higher and contributed positively to growth. We expect economic growth to remain robust in the last quarter of the year, supported by hurricane rebuilding, and some fiscal stimulus could sustain strong growth for the first half of 2018 before a second-half slowdown.

Jobs Icon (Grey)  Jobs

The November employment report showed that the U.S. economy added 228,000 jobs last month, and was accompanied by an downward revision to last month's number. The unemployment rate and participation rate remained at 4.1% and 62.7% respectively. Wage growth picked up slightly last month as production and nonsupervisory wage growth accelerated to 2.3% y/y. The November payroll gains show that the labor market continues to remain tight.

Profits Icon (Grey) Profits

With 473 companies having reported (97.0% of market cap), our current estimate for 3Q17 is $31.40 ($26.13 ex-financials). 74% of companies that have reported beat earnings expectations, and we saw particular strength in revenue growth this quarter, with revenue surprises ex-financials jumping to 1.3%, far above what we've seen in previous quarters of just about 0.5%. While 9.4% growth was slower than the 20% and 19% we saw in the first and second quarter, this slower pace is mostly due to stronger comparisons as the year has progressed rather than any weakness.

Inflation Icon (Orange)  Inflation

November inflation data was a bit mixed. Headline CPI rose to 2.2% y/y on the back of higher gasoline prices, yet the core measure (less food and energy) cooled to 1.7% y/y, which can be attributed to a sharp decline in apparel and a small decline in housing. However, some signs of future inflation appear positive through producer prices, which rose 3.1% y/y. Importantly, the Fed expects inflation to stabilize at their 2% target over the medium term, indicating current low readings should not take their rate hiking schedule off course.

Rates Icon (Orange)  Rates

The Federal Reserve announced last week that they were raising the federal funds rate by 25 bps to a range of 1.25% - 1.50%. Economic projections for 2018 showed real GDP was revised up to 2.5% and unemployment down to 3.9%. Fed funds rate projections indicate three rate hikes next year, in line with expectations. They also announced the continuation of the gradual reduction of the balance sheet. As outlined at the previous conference, the cap will increase to $20 billion from $10 billion, effective in January. Investors should note, there will be a changing of the guard next year with several voting members rotating out and a new chair. We believe the composition of this new committee may be slightly more hawkish than the current Board.

Risks Icon (Grey)  Risks
  • Danger of extensive fiscal stimulus in a full employment economy could lead to overheating.
  • Elevated asset prices, and valuations continue to rise in a low-rate environment.
  • Weak demographics could negatively impact labor force growth in the future.
Investment Themes Icon (Grey)  Investment Themes
  • Increasing earnings growth, coupled with slowly rising interest rates, still make stocks look attractive in relative terms.
  • High yield bonds look more attractive than Treasuries, but a diversified approach to fixed income investing seems appropriate given Fed tightening.
  • International exposure is warranted given growth prospects abroad, and a weaker dollar can enhance foreign returns.
Weekly Economic Update (December 18, 2017)
Important information

Please be aware that this material is for information purposes only. Any forecasts, figures, opinions, statements of financial market trends or investment techniques and strategies expressed are, unless otherwise stated, J.P. Morgan Asset Management’s own at the date of this document. They are considered to be reliable at the time of writing, may not necessarily be all-inclusive and are not guaranteed as to accuracy. They may be subject to change without reference or notification to you. JPMorgan Asset Management Marketing Limited accepts no legal responsibility or liability for any matter or opinion expressed in this material.

The value of investments and the income from them can fall as well as rise and investors may not get back the full amount invested. Past performance is not a guide to the future.


Data are as of December 18, 2017

Past performance does not guarantee future results.

Diversification does not guarantee investment returns and does not eliminate the risk of loss.

The S&P 500 Index is widely regarded as the best single gauge of the U.S. equities market. This world-renowned index includes a representative sample of 500 leading companies in leading industries of the U.S. economy. Although the S&P 500 Index focuses on the large-cap segment of the market, with approximately 75% coverage of U.S. equities, it is also an ideal proxy for the total market. An investor cannot invest directly in an index. Indexes are unmanaged.

Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. We believe the information provided here is reliable, but do not warrant its accuracy or completeness. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The views and strategies described may not be suitable for all investors. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, accounting, legal or tax advice. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation.

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© JPMorgan Chase & Co., December 2017