The Economic Forecast for 2017

Here are our macro economic thoughts:

  • The U.S. economy is forecast to continue to grow at a moderate pace of 2.2% in 2017, up from slow estimated growth of 1.6% in 2017.
  • After average annual inflation of nearly 0% in 2015 and just over 1% in 2016, inflation is forecast to broaden and widen to 2.5% in 2017.
  • Along with rising inflation and somewhat stronger economic growth, the 10‐year Treasury yield is projected to continue on a rising trend that probably reaches 3.0% by year‐end.
  • The Federal Reserve is forecast to raise the Fed Funds rate target 2 times in 2017.

With respect to the Fed and interest rates, our view is that the risks for the Fed Funds rate target and overall market interest rates are to the upside, which will largely depend on the net stimulatory impact of potential fiscal policy change by the new administration and Congress.

Consumer spending growth is expected to slow somewhat from the last 2 years, but remain at a relatively solid pace of 2.4%. Consumers should continue to benefit from improved finances, rising incomes, job growth and an official unemployment rate for the nation that will likely dip to 4.6%. However, even with the rise in Consumer Confidence from the below chart, the passage of time from being nearly 8 years of economic recovery argues that the release of large amounts of pent‐up consumer demand will likely be less significant in the New Year than in earlier years of the recovery.

After reaching Multi-Decade Lows, Household Financial Obligation Ratio Expected to Rise Gradually in 2017
Index on Conference Board Consumer Confidence showing consumer confidence rises in late 2016, especially in East North Central States

Total business spending on investment is forecast to grow again in 2017 after contracting in 2016. The recession in corporate profits ended in the second half of 2016, and confidence has been rising in both small and large business surveys, increasing the likelihood of greater private capital spending in the next year.

The international economy is expected to strengthen moderately overall in 2017, providing a boost to U.S. exports in 2017 after 2 consecutive years of weakness, although a strong dollar could be a headwind to rising international demand for US goods and services. The saga of ‘Brexit’ will continue as the U.K. moves towards formally exiting the EU. However, the European economy has generally picked up in growth during the last year, and China has stayed consistently in their yearover‐ year estimated 6‐7% GDP growth range. The 12% gain in the price of Copper during the fourth quarter argues for a better global economic circumstance in 2017.

Fiscal policy change, both Federal tax and expenditure policies, will be THE focus items of the new Congress and President Elect in 2017. However, the impact of these changes will not be reflected in the economic forecast until specific policies are approved and implemented, which will take an unknown period of time in 2017. Hence, policy changes could affect the economy more into 2018 than in 2017. Overall, this the current unknown of fiscal policy will be a large source of forecast uncertainty in 2017, offering the potential for both upward and downward revisions in economic growth and interest rates.

Higher interest rates, should they occur as expected, will likely have a slowing impact on the housing recovery, but continued improvements in consumer finances, strengthening labor markets and generally rising rents should provide some offsetting factors to rising mortgage rates.

The manufacturing sector will likely be negatively impacted by the strong dollar, but the forecast for generally rising prices on goods and commodities should improve nominal sales growth in 2017 versus the challenging period encountered by many good‐producing industries during the last two years.

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