US: 2018 will be another year of solid growth – NAB

Tony Kelly, Senior Economist at NAB, explains that 2017 has proved to be another year of solid US economic growth and more of the same is expected in 2018, helped along by fiscal stimulus.

Key Quotes

“Business survey readings are at high levels, as is consumer confidence and employment gains are strong enough to reduce the unemployment rate over time. Even inflation, surprisingly subdued this year, is showing signs of life; this will need to continue for our expectation of three more rate hikes in 2018 to be met.”

“The US economy continues to perform solidly. After a slow start to 2017, quarterly GDP growth was above 3% (annualised) in both the June and September quarters. Trend employment growth remains at a level which will continue to bring the already low unemployment rate down further over time.”

“We expect a more modest but still solid result for December quarter GDP growth of around 2½% qoq. The Atlanta Fed’s GDP nowcast is currently running at around 3% so there may be upside to our forecast.”

“The strength of the economy is also reflected in business surveys. The ISM surveys, despite easing in November, remain at reasonably high levels. Small business optimism, which bounced after last year’s presidential election, also remains elevated.”

“We expect 2018 will be another year of solid growth. This is despite a number of moderating factors that might be expected to moderate growth. The run down in the household savings rate, which has supported consumer spending over the last two years, won’t continue indefinitely. The boost to investment from mining structures investment following the rise in oil prices since early 2016 should also moderate.” 

“Moreover, monetary conditions are set to tighten. We expect that the Fed will further increase the fed funds rate given the downwards trend in unemployment and based on our expectation that inflation will shift modestly higher over the next year. We expect to see a further three rate hikes in 2018. While the hikes to-date haven’t translated into much tightening of broader indicators of financial conditions, we expect longer-term yields to move higher from their current levels and for there to be a modest appreciation of the dollar.” 

“More fundamentally, the unemployment rate is at a very low level suggesting diminishing spare capacity in the economy. However, against this it is looking likely that the US Congress will pass a major tax cuts package, which will provide a fiscal stimulus to the economy.”

“We are forecasting GDP growth of 2.3% for 2017 (revised up from 2.2%) and 2.4% in 2018 (revised from 2.3%). The forecast changes reflect the statistician’s upwards revisions to Q3 GDP growth, and the strength of recent of activity and survey indicators which feed into modestly stronger forecasts for end 2017/early 2018 GDP growth.”