US: Expect above-trend GDP growth in H2 2017 – HSBC

Analysts at HSBC expect above-trend US GDP growth in H2 2017, supported by solid gains in business investment and consumer spending as Fed Chair Yellen said recent low inflation could be “transitory”.

Key Quotes

“Temporary disruption from hurricanes has started to fade

A series of severe hurricanes in August and September caused extensive property damage in Texas, Florida, and Puerto Rico, but the disruption to economic activity in these regions has started to diminish. We expect GDP growth to average 3.0% at an annual rate in the second half of 2017, supported by a revival in business investment spending and steady gains in consumer spending. We expect GDP growth to average 2.3% this year and 2.4% in 2018.”

“Low inflation remains a key focus for the FOMC

• Core inflation increased in 2016 but abruptly slowed in early 2017. Is the recent slowdown in core inflation “transitory” as some Fed officials surmise, or could it be more permanent? 
• The sharp drop in charges for wireless phone services early in 2017 is unlikely to be repeated. Therefore, the impact of this development on core inflation should fade next year. In contrast, inflation in healthcare and education costs may have dropped to a new lower trend – one that may be more persistent than transitory. If that is the case, then core PCE inflation may not be as responsive to the traditional drivers of inflation such as the degree of slack in the economy.
• Our forecasts for core PCE inflation are 1.4% for 2017 and 1.7% in 2018 (vs 1.5% and 1.9%, respectively, from the FOMC). We are not looking for as much of a pickup in inflation next year as does the median FOMC projection, since we believe there are certain underlying trends that are more permanently restraining inflation in the US. 
• We think that a Fed rate hike of 25bp is likely in December. However, if we are right in forecasting a slower rate of inflation in 2018 than most FOMC members expect, the policymakers may hesitate to follow through on their current projection of three rate hikes next year. More Committee members might come around to the view that the slowdown in inflation is not as transitory as previously thought. This is one reason why we are forecasting only one 25bp rate hike in 2018, most likely in March, followed by an extended pause.”