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January
26
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Week In Review

GDP

US GDP rose at a 2.6% annualized rate in the fourth quarter of 2017, below consensus estimates of 3.0%. Personal consumption was up 3.8%, business investment rose 6.8%, residential investment increased 11.6%, and government consumption grew by 3.0%. Net exports decreased dramatically, reducing GDP by 1.13%. A slowdown in inventory growth also reduced GDP.

Our Take

The headline number looks like a disappointment, but GDP was actually very solid. Strong goods consumption was partially offset by rapidly rising imports. US companies seem likely to increase production to better meet demand, especially in light of tax reductions. For now, it appears the economy is positioned for strong growth in 2018.


Tariffs

The Trump administration imposed tariffs on solar panels and washing machines from Korea, claiming that US producers were being hurt by cheaper imports. Korea filed a complaint challenging the tariffs at the WTO. Commerce Secretary Ross indicated that the US would likely implement more protections for domestic producers.

Our Take

As in almost all cases, these tariffs are likely to produce concentrated benefits for a few interests, while also producing dispersed costs on the US and global economy as a whole that outweigh those benefits. Significant trade restrictions, or even fears of more restrictions could act to slow economic growth.


US Dollar

Treasury Secretary Mnuchin made remarks that the weaker dollar is a benefit to US exports, and this sent the dollar even lower. Mnuchin also stated that a commitment to a market-based exchange rate and that the long-term level of the dollar is related to the strength of the US economy.

Our Take

While Mnuchin’s comments don’t represent a change in US policy or a violation of the Plaza Accords, many are reading any statement that there are some benefits to a weaker dollar as support for currency weakening to promote exports. A resumption of the competitive currency devaluations of the mid twentieth century would also be a strong headwind to economic growth.


Municipals

The Pennsylvania Commonwealth Financing Authority is getting ready to sell $1.4 billion in Tobacco Master Settlement Revenue Bonds next week. Proceeds from the Pennsylvania tobacco bond sale will be used to help close the commonwealth’s 2017 budget deficit. Pennsylvania’s tobacco bond sale will be the largest since California issued $1.7 billion in tobacco bonds in 2015 according to Bloomberg.

Our Take

Lawmakers approved the bond sale last fall. Pennsylvania had been struggling with lower- than-expected tax collections and needed to close a $1.5 billion budget deficit. Using funds from the sale of tobacco bonds to close the budget gap frees the commonwealth from increasing taxes or cutting programs in order to cover the deficit but is a short-term fix. Lawmakers will need to find other ways to cut costs next year if revenue falls short again.