Sunday, 30 of April of 2017

Economics. Explained.  

GDP Forecasts

April 28, 2017

First quarter GDP growth was softer than expected as growth came in at just 0.7% versus an expected increase of about 1.5.  However, this figure will get revised twice in coming months so this is not the final word.  A lot of the weakness came in inventories which rose by just $10.3 billion in the first quarter compared to $49.6 billion in the first quarter.  Thus, the inventory component subtracted 1.0% from GDP growth in the first quarter.

We continue to expect a pickup in growth in the quarters ahead.  Likely cuts in both individual and corporate income tax rates along with simplification of the tax codes, combined with repatriation of corporate earnings currently locked overseas and huge investments in spending on infrastructure  should help. Given that the economy is at full employment that faster pace of growth will probably boost both the CPI  and the core CPI to 2.4%.  Higher inflation will push long-term interest rates higher with the 10-year hitting 2.7% by the end of 2017 and mortgage rates climbing to 4.3%.

With GDP expanding at a pace at roughly its potential and inflation only slightly above its target, the Fed will not feel compelled to rush into any further tightening.  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 two more rate hikes in 2017 which would put the funds rate at 1.25% by the end of this year.

Stephen Slifer


Charleston, SC


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