Economy grows with little signs of recession

posted by Simply Money Advisors Team -

Both stocks and bonds had a good first half of the year and Simply Money Advisors believes you'll continue to see positive returns in the second half of 2017. The reason is simple: the economy shows no sign of a recession. Our recession indicators, data we look at such as housing starts, suggest a low 6% chance of a recession in 2017.

Some economists worry the Federal Reserve, our nation’s central bank, could cause the U.S. economy to slow down. The Federal Reserve has raised short-term interest rates (the federal funds rate that bank charge each other to borrow money) twice this year, and it may raise rates again this year.  The concern is the Federal Reserve is raising interest rates as inflation is falling. The Federal Reserve has two goals: full employment and stable prices (inflation). With the unemployment rate at 4.3%, the country is close to full employment. However, the Federal Reserve is targeting a 2% inflation rate, but inflation is only 1.4%. If the Federal Reserve continues raising interest rates, it could cause inflation to slow further. While the Federal Reserve's actions certainly do not encourage economic growth, the economy has improved enough to the point that it can handle slightly higher short-term interest rates. 

There are many important economic releases in this holiday-shortened week. The most closely watched will be the jobs data this Friday. Economists expect the unemployment to remain at 4.3% and that 177,000 new jobs were added in June. Other releases to watch this week are reports on manufacturing, services, auto sales, and the minutes from the Federal Reserve's meeting in June. 

Simply Money Advisors believes that stocks and bonds should see further gains as we head into the second half of 2017. The fear the Federal Reserve may slow down the economy is overstated. This fear may cause stocks to experience a temporary drop, but the important point is that while the Federal Reserve has been raising short-term interest rates, they are not raising rates into a weakening economy. We would be much more worried if the Federal Reserve was hiking as the economy was slowing down. The economic growth rate for the second quarter likely improved to around 3% from the first quarter's 1.4% growth rate. Another reason we believe stock prices will increase in the months ahead is that since 1950 when large-cap U.S. stocks, big companies like Cincinnati’s Procter & Gamble, are higher in the first half of the year, the same stocks have seen higher returns 85% of the time in the second half of the year. 

The Simply Money Point

With all of the media noise surrounding the Federal Reserve’s rise of interest rates, the economy continues to grow. Investors like you should remain confident in your investment mix. Follow your personalized financial plan and don’t let the buzz of the media distract you from your financial goals.

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