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2017 U.S. Economic Forecast: Stir it Up... Will Trump Boost Growth?

The Jan. 20 inauguration of Donald Trump as the 45th U.S. president could usher in a sea change for government policy in 2017. While none of us can be sure what will come to pass during his administration, his calls for steep tax cuts, planned rollbacks in environmental and financial regulations, and his hard line on trade and immigration positions won't likely be forgotten.

Meanwhile, President-elect Trump will inherit a much stronger economy than his predecessor did. Largely forgotten in all the rhetoric and fanfare of the campaign is the fact that data show the world's largest economy continuing to expand at a reasonably good pace. After a short slump to start the year, GDP bounced back, growing 3.2% in the third quarter--the fastest pace since the same period in 2014. We now expect the U.S. economy to expand 1.6% this year, 2.4% next year, and 2.3% in 2018. We did not consider campaign promises in our baseline forecast. Once the administration's proposals become clearer, and we have a better understanding of congressional approval, we will consider policy changes in our baseline forecast.

Overview

  • S&P Global economists expect the U.S. economy to expand 1.6% this year, 2.4% in 2017, and 2.3% in 2018.
  • We expect the unemployment rate to dip to around 4.6% and wage gains to reach 3.6% year over year by year-end 2017. As wages continue to strengthen, people will more readily open their pocketbooks; consumer spending will likely grow 2.5% next year.
  • We anticipate the Fed will hike interest rates at the Dec. 13-14 meeting, on housing market, job, and wage gains. Assuming the economy continues to grow at a moderate pace, the Fed will likely raise rates two more next year and three times in 2018.

Employment conditions have strengthened notably, with average monthly job gains of 180,000 year-to-date. We expect job gains to slow to a still-solid average rate of around 150,000 next year. We also expect the unemployment rate to dip to around 4.6% by year-end 2017. And as we've long expected, this has given wages a boost--with American workers doing their economic duty and spending that extra cash at the mall. In this light, S&P Global Ratings expects consumer spending to remain strong--growing 2.5% next year--as the jobs market and wages continue to strengthen.

We also expect the housing market to reap the rewards of stronger household balance sheets and larger paychecks. Housing starts surged 25.5% to a seasonally adjusted annual rate of 1.323 million units in October, the fastest pace since August 2007. With building permits (a forward-looking indicator of starts) now the highest since last November, we expect housing starts to reach 1.3 million in 2017. Home sales will likely remain strong into 2018 as Millennials start to shed higher rents in favor of owning homes of their own.

S&P Global Economic Overview

2015 2016e 2017e
(Key Indicator)
(period average, unless otherwise noted)
Real GDP (%) 2.6 1.6 2.4
Real consumer spending (%) 3.2 2.6 2.5
Real equipment investment (%) 3.5 (2.6) 2.4
Real nonresidential construction (%) (4.4) (3.5) 3.0
Real residential construction (%) 11.7 4.7 4.1
Core CPI (%) 1.8 2.2 2.2
Unemployment rate (%) 5.3 4.9 4.6
Housing starts (mil.) 1.1 1.2 1.3
S&P Case-Shiller 20-City Home Price Index (Dec. to Dec. % change) 4.6 5.0 4.0
Federal Reserve's fed funds policy target rate range (year-end %)* 0.25-0.50 0.50-0.75 1.25-110

Note: All % are annual average percent change. Core CPI is consumer price index excluding energy and food components. *Assumes one rate hike of 25 basis points in December 2016 and two more rate hikes of 25 basis points each by the end of 2017. e--Estimate.

At the same time, supply constraints, including shortages of labor and lots, have hampered housing activity through most of the recovery and will likely continue to be a roadblock for builders in 2017. And while we don't factor stricter immigration laws and increased infrastructure spending into our baseline forecast, these could exacerbate supply constraints into 2018.