U.S. GDP numbers were released last Friday, which means we can now finish 2016 year-in-review series by taking a look at major economic indicators. The employment situation continued to improve in 2016 (Exhibit 1). The U.S. economy added 2.1 million new jobs (180,000 a month), but that was 21% lower than 2.7 million jobs added in 2015. Total employment increased 1.5% which was double the steady 0.8% population growth (2.5 million increase). The unemployment rate ended the year at 4.7%, which is well within the range of what Fed currently considers full employment. U-6 rate was 9.2% – it’s a broader measure defined as “Total unemployed, plus all marginally attached workers plus total employed part time for economic reasons”.
Exhibit 1 – Employment
Real GDP growth decelerated to 1.6% last year – a full percentage point drop from 2015 (Exhibit 2). Higher inflation was partly responsible for the real GDP slowdown – CPI finally made it over the 2% mark (and Fed’s target) in 2016. With both unemployment and inflation now better than Fed’s targets, we can expect more interest rate increases to build on Dec 2015 and Dec 2016 raises of 0.25% each. Dollar continued its relentless march up, albeit at a much slower pace.
Exhibit 2 – Growth & Inflation
Public debt increased further 3.4% to $19.5 trillion (Exhibit 3). After couple declining years, budget deficit soared by 34% to $587bn or 3.5% of GDP. This was the last year under Obama’s policies and we can expect big changes under President Trump. Despite ending QE3 in late 2014, Federal Reserve’s balance sheet was steady at $4.2 trillion. Fed has been buying more paper to replace maturing holdings, although the duration of its portfolio has been on the decline. There was an article in Wall Street Journal today talking about Fed’s exit strategy – it seems they are likely to reduce holdings of mortgage securities and replace them by Treasuries while slowly reducing overall portfolio size.
Exhibit 3 – Debt & Deficit
Note: Public debt figure as of Q3:2016
S&P 500 earnings returned to growth after dropping in 2015 (Exhibit 4). This was driven by expanding profit margins and to a lesser extent sales growth. Dollar strength wasn’t as much of a headwind for multinational companies. P/E multiple stayed right around 20x, so the earnings growth resulted in a pretty decent return of 9.5% (excl. dividends) for the index. 10-Year Treasury rate rose to 2.45%, although that happened after the election and the average rate throughout the year was actually 30 bps lower than in 2015. 30-Year Fixed Mortgage rates also rose 30 basis points ending the year at 4.3%.
Exhibit 4 – Earnings & Rates
Note: Q4:2016 S&P 500 earnings are consensus estimates as of Jan 26, 2017
Finally, the housing sector continued improving (Exhibit 5). Both unit growth and price increases stayed healthy. It remains to be seen how rising mortgage rates (see above) will affect these trends. U.S. auto sales increased only slightly to 17.9 million a year, but it was good enough for an all-time high. Many industry observers are now talking about “peak auto” – the idea that the car sales market has plateaued and the growth will become harder to come by. Longer term trends (Uber, driverless cars, etc.) would certainly support this view.
Exhibit 5 – Housing & Autos
Note: S&P Case-Shiller 20-City Home Price Index as of Nov 2016