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Expectations Are Moderating, But The Economy Is Doing Fine

The tax cut is going to take longer than expected to be enacted by Congress, and it may never happen at all. In fact, even if there is a tax cut, it probably won't be as big as what was widely expected earlier this year. Meanwhile, car sales plunged and a string of positive economic surprises for months has come to an abrupt halt.

All this may sound grim, but it's just a reversion to the mean.

For months, Citigroup's Economic Surprise Index, which measures how often data come in better than expected, had soared. For months in late 2016, economic releases kept surprising investors on the upside. With last month's data coming in Friday, it continued a sudden sharp drop.

On Thursday and Friday, Financial Times and The Wall Street Journal, respectively, published articles saying a new reality may be taking hold on Wall Street. But keep in mind that these excellent daily newspapers have to write something every day, and sometimes may lose track of the long-term focus.

For example, auto sales in March declined, which led some pundits to seize upon as a bad harbinger for economic growth. Actually, monthly auto sales figures are choppy and have simply reverted to a long-term mean.

And, as for the Citigroup surprise index, good surprises cannot go on forever or there would never be any surprises. That index too, is merely reverting to its longer-term mean.

While the economy is not as hot as what many expected it to be after the sweeping Republican victory, which fueled optimism for lower tax rates, the bottom line on the whole array of forward-looking economic data is for continued growth ahead.

The leading economic indicators rose yet again in March, according to data released Friday, reaching a high point not achieved in over a decade.

The LEI, which is designed to look at what's ahead, shot up by 0.4% in March. That followed a rise of .6% in December, January and February, after modest gains in October and November. "The March increase and upward trend in the U.S. LEI point to continued economic growth in 2017, with perhaps an acceleration later in the year if consumer spending and investment pick up," according to the release by The Conference Board.

Accelerating growth is widely expected for the second-, third-, and fourth-quarter of 2017.

The LEI has definitively rolled over well in advance of recessions. There's no suggestion of that happening now.

After the election, the National Federation of Independent Business' Optimism Index surged by about as much as it has since the index began being tracked three decades ago.

That's an important measure because small business created most of the jobs in the U.S.

While the index ticked down last month, the post-election surge has held up. "The Index of Small Business Optimism fell 0.6 points to 104.7, sustaining the remarkable surge in optimism that started November 9, 2016, the day after the election," according to NFIB economists. "It is encouraging that the Index has held at historically high levels for five months. Optimism has not faded much and there is growing evidence that this optimism is being translated into more spending and hiring, although not at explosive rates."

Meanwhile, the Federal Reserve Bank released its latest report on economic activity for the six weeks through the end of March, and said "the pickup was evident to varying degrees across economic sectors."

There is no slowdown underway.

In addition, the International Monetary Fund issued its world economic outlook showing global economic activity is accelerating. The IMF said the 2016 growth rate of 3.1% will surge to 3.5% in 2017, and rise to 3.6% in 2018.

IMF's latest forecast for the U.S. is also looking good, rising from 1.6% in 2016 to 2.3% this year, and 2.5% in 2018.

"Global economic activity is picking up with a long-awaited cyclical recovery in investment, manufacturing, and trade," according to Chapter 1 of this World Economic Outlook.

Although optimism that followed the election may have become a bit overdone, economic growth is expected to accelerate.

The Standard & Poor's 500 index closed the week at 2,348.69, up about 0.85%, and remained not far off its all-time high.

Investor euphoria that followed the election, when the promise of a major tax cut set off a rally in stocks, has given way to worries about how to finance tax reform without increasing the nation's budget deficit. Geopolitical turmoil - the Syrian crisis and tensions over North Korea's effort to acquire intercontinental nuclear missiles - are also adding to uncertainty, and a correction of 10% or 15% could come at any time.

However, predicting the growth rate of the U.S. economy for this quarter or forecasting the next drop or surge in stock prices is a guessing game. Stocks could resume their rise if growth continues to accelerate as expected.

This article was written by a veteran financial journalist based on data compiled and analyzed by independent economist, Fritz Meyer. While these are sources we believe to be reliable, the information is not intended to be used as financial advice without consulting a professional about your personal situation.

Indices are unmanaged and not available for direct investment. Investments with higher return potential carry greater risk for loss. Past performance is not an indicator of your future results.

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This article was written by a professional financial journalist for The Hogan-Knotts Financial Group and is not intended as legal or investment advice.

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