Economy grows steadily while corporate profits surge

Wall Street investors may eventually focus on President Trump's decision to fire FBI Director James Comey, but at this point, there appears to be little economic downside because of this. Simply Money Advisors continues to believe that any economic impact from tax reform or government spending on infrastructure will occur in 2018. This news does not change that; it actually makes it more likely since this change could result in increased tensions on Capitol Hill. We also continue to believe the U.S. economy will slowly grow around 2% in 2017 with spending by you, the consumer, leading the way.

Speaking of which, last week provided our first clue on spending from consumers like you for the second quarter. ‘Core’ retail sales (which exclude gas purchases and car purchases) were up 0.2% in April compared to March. While this was slightly less than expected, retail sales for March were revised higher. Taken together, retail sales were close to expectations. This indicates to us at Simply Money Advisors that the economy will see improved growth compared to the first quarter's (January, February, March) modest 0.7% growth rate. Current expectations for growth in the second quarter (April, May, and June) is a healthy 3%.

This rebound in growth should allow the Federal Reserve, our nation’s central bank, to raise short-term interest rates at its next meeting on June 14th. The markets are pricing in a 94% chance of a rate hike at that meeting. With inflation below the Federal Reserve's 2% target, we believe the Federal Reserve will not raise short-term interest rates too aggressively, though. Because interest rates are still very low by historical measures, we expect one or two more interest rate hikes this year. Beyond that, economic growth and inflation will need to be consistently higher to see the Federal Reserve raise interest rates more quickly.

The Simply Money Point

While the economy is growing much as it has over the past five years, corporate profits are surging. Earnings are about 15% stronger and sales are nearly 9% higher compared to last year, on average. We believe profits will continue to improve throughout 2017. This should be beneficial for any stock exposure in your investments.

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