What I Expect For 2017
We flip the page on another year – closing out 2016 and opening 2017. Here are a few things I except for the coming 12 months.
Near-term Growth Led by Consumers and Capital Investment
After growing 1.9 percent in 2015, the economy expanded a paltry 1.7 percent in 2016. I expect a modest up-tick and improvement in 2017. While uncertainties abound, and some new ones have arisen since the election, moving past election uncertainty should help stabilize growth. Consumer spending will account for most of economic growth in 2017 – a bright spot in an otherwise melancholy environment.
Stronger fixed investment in 2017 will also contribute to a stronger economic picture. After growing five percent in 2015, nonresidential fixed investment grew only 0.8 percent in 2015 and a meager 0.6 percent in 2016, contributing only one-tenth of one percent to GDP in 2016. While business fixed investment is a function of growth, and slower growth means less investment, higher oil prices in 2017 should bring stronger investment in oil drilling infrastructure.
Inlation, Interest Rates and Dollar Strengthen
2017 will likely bring tax cuts and spending increases which will support higher near-term economic growth. However, these fiscal measures will likely push inflation, interest rates and the value of the dollar higher. While still well maintained, inflation will edge slowly higher with a strengthening dollar and upward movements in oil prices. Anchored inflation expectations of two percent should also drive inflation higher as will continued tightening in the labor market.
Interest rates will also move higher in 2017. Vice Chairman of the Federal Reserve Board of Governors Stanley Fischer recently noted, “While there is disagreement about what the most effective policies would be, some combination of improved public infrastructure, better education, more encouragement for private investment, and more effective regulation all likely have a role to play in promoting faster growth of productivity and living standards. By raising equilibrium interest rates, such policies may also reduce the probability that the economy, and the Federal Reserve, will have to contend more than is necessary with the effective lower bound on interest rates.”
In other words, policies that drive productivity and enhance living standards will have the added benefit of rising interest rates and improving the tool set available to the Federal Reserve in responding to negative economic shocks.
Finally, the dollar should continue to edge higher. The dollar has been moving higher since 2014, driven by net capital inflows as a result of widening interest differentials. Higher interest rates will exert upward pressure on the dollar. More, widening global uncertainties have also driven capital to perceived safe havens like the U.S.
No Recession in 2017, but One in 2018
I believe we miss a recession in 2017, with most factors leaning towards growth. However, the risk of a recession gets marginally more difficult to avoid by the fall of 2018. If we make it through 2017 sans recession, we will be in the midst of one of the longest periods of economic expansion in the history of the country. Despite the tepidness of the expansion, we are likely due a recession in 2018.
There are plenty of risks that keep me up at night and a myriad of uncertainties that continue to weigh on expectations. While we expect fiscal stimulus in 2017, it isn’t clear how this will be paid for or over what timeline. The risk of trade wars because of protectionary maneuvers or a shrinking labor force because of changing immigration policy could dampen economic expectations. While unlikely, a surge in oil prices could significantly dampen economic prosperity. There are risks to continued growth in household net worth.
Asset price valuations are a concern – with both equities and bonds overvalued. Lending standards remain tight which likely curtails continued appreciation of home prices. Globally, a sharper slowdown in China will reverberate through the global economy and already has adversely impacted commodity rich countries. Widening conflict in the Middle East, instability in Turkey, and problems in the European periphery remain key global risks. All told, a large number of risks, with differing probabilities, weigh on the outlook – especially as we move beyond the next 12 months.
Shawn G. DuBravac, PhD, CTA