2018 Economic Outlook

January 4, 2018

 

 

Current Situation

2018 starts with the US economy in a pretty good place. Economic growth, measured by GDP, has been strong in the second and third quarters of 2017. The annualized growth rate these two quarters topped 3 percent and there is no reason to doubt that the fourth quarter figure will also be solid.

 

U.S. Economic Growth by Quarter 

 

A strong economy needs to add jobs, and in this measure 2017 did not disappoint. While 2017 trails 2016 in U.S. job growth thru November, it is still on pace to add over 2 million jobs, a very respectable number.

 

U.S. Employment Growth by Month

The industries with the most job growth were professional business services and health care, but it is notable than manufacturing added 181,000 jobs in the year ending November 2017. It had lost 27,000 jobs the year before.

In other indicators, retail sales surged late in 2017. Unfortunately, this surge is largely due to a spike in home improvement purchases brought on by a damaging hurricane season. Inflation, as measured by the Consumer Price Index, is higher than it was a year ago, but still well under control at 2.2 percent.

If you want something to be concerned about, you can turn to construction spending, which was very flat in 2017 after a robust 2016. Non-residential construction showed a slight decline which tempered overall construction numbers.

 

Outlook for 2018

Aside from construction leveling off, there is every reason to believe 2018 will be a continuation of 2017’s solid economic growth. There are three wildcards that will influence the economy throughout the year.

 

Tax Cuts. The first one has already happened as the Tax Cuts and Jobs Act was passed in 2017. These cuts will affect the taxes we will file in 2019, but we will certainly see their impact throughout 2018. Many hope the corporate cuts will result in new, tangible investment (like plants and equipment), but most economists believe much of the savings will be invested in financial assets that help shareholders, not workers.

 

Still, the income tax cuts should translate into some more cash entering the economy as individuals adjust their withholding. This could have a small, positive impact on the economy.

 

Monetary Policy. Not to get too nerdy here, but Federal Reserve Bank policy will certainly impact 2018’s economy as well, specifically, the Fed’s drive to raise interest rates. The current Federal Funds Rate is 1.5 percent. Most Fed watchers expect the Fed to continue to ratchet this rate up in 2018 for a couple of reasons.

 

First, the Fed is always concerned about inflation and there are concerns the tight labor market (remember, the current unemployment rate is just 4.1 percent) will begin to send prices higher.

Secondly, the Fed should be concerned that if the economy did turn south in a hurry, it would not be able to combat the downturn by lowering interest rates. By raising interest rates now, they are essentially re-arming themselves to be better able to aid the economy should it slip into recession.

 

Infrastructure. This variable holds the most potential for cities and economic developers. When he was campaigning, President Trump spoke frequently of a trillion-dollar infrastructure plan. There was no action on this in 2017, but it appears to be a front-burner issue in 2018. A trillion dollars might be wishful thinking. The latest rumors of the plan suggest $200 billion of federal money that will leverage an additional $800 million from local and private sources. Still, this effort could have a big, positive impact on the economy. As Americans, we tend to take our infrastructure for granted, but the roads, bridges, ports and pipelines that our economy is built on, cost money to build and maintain. Focus on this issue from the Federal level is overdue and welcome. Not only are the projects themselves important, but infrastructure investment also creates good-paying, if temporary, construction jobs. This would certainly boost construction activity which has been flagging as of late.

 

Summary

Again, the economy is in a good place. Barring outside forces, you can expect this to continue in 2018. Look for the economy to grow somewhere in the 2.5 to 2.7 percent range. Employment should continue to be strong averaging about 200,000 new jobs every month. This figure could jump if the infrastructure plan has legs and new projects are initiated.

 

2018 could surpass expectations if:

  • consumers find more savings in their paycheck and choose to shop with those savings. Keep an eye on our retail sales chart to track this.

  • new construction projects begin and we see a spike in construction employment.

 

2018 could disappoint if:

  • money saved from the tax cuts is largely invested in financial assets rather than tangible assets (like new factories and equipment). Remember, our last two recessions were caused by bursting bubbles where too much money flowed into speculative assets (Dot-com stock in 2000-01 and real estate in 2007-08).

  • The infrastructure plan doesn’t materialize or local governments find themselves too strapped to raise funds to leverage those federal dollars.

 

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