Saturday, 21 of October of 2017

Economics. Explained.  

GDP Forecasts

September 28, 2017

Second quarter GDP growth is now 3.1% which is an upward revision from the original estimate of 2.6% and the first revised estimate of 3.0%  .While the economy’s trend rate of growth appears solid, third quarter growth will be hit by the negative impact from Hurricane’s Harvey and Irma,

Consumer spending rose a solid 3.3% in the second quarter.  It is likely to slow to a 2.4% pace in the third quarter as hurricanes adversely impact consumers willingness/ability to spend.    But fourth quarter growth should rebound to about the 3.0% mark.  The prospect of tax cuts later this year has lifted the stock market to a record high level.  The increase in stock prices is boosting household wealth.  The gains in employment are generating income which gives consumers the ability to spend.  Consumer debt is very low in relation to income.  Consumer confidence is at a multi-year high.  Gas prices have been rising in the wake of the two hurricanes but remain low  Interest rates remain low and are rising very slowly.

Investment spending rose 7.2% in the first quarter and an additional 6.7% in the second quarter.  But it was essentially unchanged for the past three years.  It appears that the prospect of corporate tax cuts, repatriation of earnings at a favorable tax rate, and a reduction in the regulatory burden is giving business leaders confidence to open their wallets and spend on new equipment and technology.  Not only will this boost GDP growth in the short term, if investment continues to climb it will boost productivity growth which will, in turn, raise the economic speed limit from about 1.8% today to 2.8%.

And the trade gap should narrow slightly this year.  Early in the year the dollar was strong which suggested slower growth in exports and faster growth in imports and that trade might subtract something from GDP growth in 2017.  But in the past six months the dollar has weakened significantly.  On balance, trade will  be neither add to nor subtract from  GDP growth in 2017.

Expect GDP growth of 1.8% in the third quarter followed by a rebound to the 3.0% mark in Q4.  That implies GDP growth for 2017 of 2.3% and we expect 2.8% growth in 2018.

The recent price war amongst wireless phone providers and falling prescription drug prices caused by Trump-led intimidation of the industry has slightly lowered the trajectory for inflation.  However, the economy is at full employment and there is a shortage of available homes and apartments in the housing sector so inflation does, in fact, seem headed higher as the year progresses.   As a result we expect the core CPI to rise  1.8% this year and 2.3% in 2018 (versus 1.7% currently).  Slightly faster inflation will push long-term interest rates higher with the 10-year hitting 2.45% by the end of 2017 and mortgage rates climbing to 4.1%.

With GDP expanding at a pace at roughly its potential and inflation only slightly above its target, the Fed will feel compelled to continue on a path towards gradually higher interest rates.  It needs to do so to get itself into position to lower rates when the time comes, but it appears to have the luxury of taking its time.  We expect one more rate hike in 2017 which would put the funds rate at 1.25% by the end of this year.  The Fed will also begin to run off some of its security holdings in October.

Stephen Slifer

NumberNomics

Charleston, SC

 


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