Thursday, 22 of February of 2018

Economics. Explained.  

GDP Forecasts

February 16, 2018

 

Fourth quarter GDP growth came in at 2.6% which was a bit less than the 3.0% rate that had been projected.  However, the shortfall was all in inventories.  Final sales, which excludes the change in inventories rose by a solid 3.2%.

Consumer spending climbed at a robust 3.8% rate in the fourth quarter following growth of 2.2% in the third quarter.  Third quarter growth was held down by the two hurricanes last summer, and fourth quarter growth represents the rebound.  We expect consumer spending to rise 2.8% this year.  The consumer and corporate tax cuts have 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 are expected to remain at their current relatively low level through the end of this year.  Interest rates remain low and are rising very slowly.

Investment spending rose 6.8% in the fourth quarter after climbing 4.7% in the third quarter.  However, investment spending was essentially unchanged for the previous 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% or so in the years ahead.

The trade gap widened by $55.1 billion in the fourth quarter after having narrowed by $16.1 billion in the third quarter.  The swings seem to reflect the inability to import goods into the Houston area in the third quarter in the wake of the two hurricanes, and the subsequent rebound in Q4.  We expect the trade component to have little impact on GDP growth in 2018.

Expect GDP growth of 2.9% in 2018 after having registered growth of 2.5% in 2017.

The inflation rate is gradually beginning to climb.  The economy is at full employment which finally appears to be boosting wages.  Both manufacturing and non-manufacturing firms are paying high prices for their raw materials so commodity prices are on the rise.  There is a shortage of available homes and apartments in the housing sector which is raising rents.  Thus inflation does, in fact, seem headed higher as the year progresses.   However, the pickup in inflation will be limited as internet price shopping will keep goods prices falling in 2018.  As a result we expect the core CPI to rise  1.8% last year to 2.4% in 2018.  Slightly faster inflation will push long-term interest rates higher with the 10-year hitting 3.1% by the end of 2018 and mortgage rates climbing to 4.6%.

With GDP likely to expand in 2018 at a rate slightly faster than its  potential and inflation expected to rise 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 three rate hikes in 2018 which would put the funds rate at 2.0% by the end of that year.  The Fed will also continue to run off some of its security holdings throughout 2018.

Stephen Slifer

NumberNomics

Charleston, SC

 


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