The economy grew firmly in 4Q2017 led by consumer spending and investment in capital equipment. Real GDP grew 2.6% q/q with the full-year GDP at 2.3% from 1.5% in 2016, which is marginally higher than our projection of 2.2%. We are of the view that the economy will maintain its strong growth momentum in 1Q2018 given that the orders of durable goods expanded at a healthy pace in December with many companies announcing oneoff bonuses following the passage of the tax bill, and an increase in minimum wages. Hence, we expect inventories to bounce back. While staying positive on the economic outlook, we remain cautious on the 1Q effect as the economy tends to dip in 1Q and rebound in 2Q. Our assessment indicates a possibility of about 0.5–0.8 percentage point being shed from 1Q GDP. Nevertheless, we are projecting a GDP of 2.5% for the full year of 2018. In the meantime, we expect the Fed to send a modest signal of a hawkish tone during the January 30–31 FOMC meeting to pave the way for a hike at the March 20–21 meeting. We are maintaining our 3-rate hike view for 2018.

• The economy grew firmly in 4Q2017 led by consumer spending and investment in capital equipment. Real GDP grew 2.6% q/q following 3.2% q/q in 3Q2017. For the full year of 2017, the economy expanded to 2.3% from 1.5% in 2016, which is marginally higher than our projection of 2.2%.

• 4Q2017 growth was depressed by a sharp drop in inventory and drag from net trade. The effects are likely to be related to reconstruction spending after the hurricanes. We expect this effect to likely fade as we move ahead since the final domestic sales, which exclude these components, grew strongly by 4.3%.

• We are of the view that the economy will maintain its strong growth momentum in 1Q2018 given that the orders of durable goods climbed at a healthy pace in December. On the consumer side, many companies have announced oneoff bonuses following the passage of the tax bill and alongside increases in minimum wages and continuing employment growth, incomes should be well supported. Hence, we expect inventories to bounce back.

• Besides, the data of new orders suggests that further increases in capex should be forthcoming. Orders for long-lasting manufactured goods soared 2.9% in December, the fastest pace since June and another sign of strength of the industry. Orders for non-defence capital goods, excluding aircraft, a closely watched proxy for business spending plans, fell 0.3% in December, the first drop in six months.

• While staying positive on the economic outlook, we remain cautious on the 1Q effect. The economy tends to dip in 1Q and rebound in 2Q. This would seem to reflect difficulties with seasonal adjustment which depresses 1Q activity. Our assessment indicates a possibility of about 0.5–0.8 percentage points being shed from 1QGDP. Nevertheless, we are projecting a GDP of 2.5% for the full year of 2018.

• In the meantime, we expect the Fed to send a modest signal of a hawkish tone during the January 30–31 FOMC meeting to pave the way for a hike at the March 20–21 meeting. We are maintaining our 3-rate hike view for 2018.

Source: AmInvest Research - 29 Jan 2018