U.S. fourth quarter GDP: More than meets the eye?

On the latest edition of Market Week in Review, Rob Cittadini, director, Americas institutional, chatted with Chief Investment Strategist Erik Ristuben about the recent slowdown in gross domestic product (GDP) growth in the U.S.

Q4 economic growth in U.S. falls short of consensus expectations

The GDP growth rate for the U.S. during the fourth quarter of 2017 slowed to 2.6%, according to a report from the Department of Commerce—down from 3.2% during the third quarter. This was a disappointing number for many industry analysts, who had been anticipating roughly 3% growth, Ristuben said. However, in his opinion, a more in-depth look at the data reveals that the number was actually good. “There were really just two big things that cut into the nation’s growth: Increased imports and a reduction in inventory—both of which are a drag on GDP,” Ristuben explained. What’s more important, he stressed, is that the fundamental economic data in the report was very strong, as evidenced by a 3.8% quarterly increase in consumer spending, and an 11% jump in business investment.

“The bottom line is that the U.S. economy is still doing very well,” he said—“and it’s actually this strong performance that should be a bit of a concern for investors, if anything.” Why? Achieving solid future market performance means meeting, if not beating, expectations from previous quarters, Ristuben explained—and the more positive the data that comes in, the more expectations ratchet up down the line.

Market impact of weak U.S. dollar

Expanding the conversation to the U.S. dollar, Ristuben noted that the greenback has been weakening since early last year—a trend that has continued into 2018. “So far, in January, the dollar is off a little more than 3%, according to the U.S. Dollar Index,” he stated. What could this mean for U.S. equities? The weakness of the dollar may help explain the recent strong performance of the S&P 500® Index when compared to the STOXX® Europe 600 index, Ristuben said.  “A lot of the outperformance of the U.S. in many key measures, including financial markets, can probably be attributed to the ongoing slide in the dollar,” he said.

Concerns over strength of euro

Transitioning to Europe, Ristuben pointed out that the region continues to experience solid economic growth—as evidenced by European Central Bank (ECB) President Mario Draghi’s comments at a Jan. 25 press conference that the economic expansion has been greater than even the bank expected.

“In line with this, Draghi tried to jawbone the euro down a bit in his remarks,” Ristuben said—“although many investors actually wished he had done so more aggressively.” Why? A very strong currency can actually slow down economic growth, he said. “This is because a country’s exports become more expensive—while earnings are reduced for multinational companies,” Ristuben explained. “So, while having a strong currency is often a sign of good things happening on a relative basis, it’s usually smart to limit just how strong the currency gets.” The euro in particular, he said, has surged over the past 18 months in comparison to the dollar.

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