December 21, 2017
Stephen Stanley, the top-ranked economist at Amherst Pierpont who last year accurately predicted that real U.S. economic growth would reach 3 percent in 2017, published a list of 10 predictions for 2018.
“I am feeling a little pressure to live up my 2017 prognostications,” he said in a Dec. 20 report to clients. “I failed miserably on my inflation forecast, but otherwise I had a number of winners.”
In addition to his accurate GDP forecast, he also expected a significant jump in business investment, the Federal Reserve to raise interest rates three times, the jobs market to be the tightest since the 1990s, that President Donald Trump wouldn’t nominate Fed Chair Janet Yellen for another term and that Congress would pass a major tax cut.
“With a tax cut package finally passed by Congress, growth is likely to remain robust as we head into 2018,” Stanley said. “The economy’s 2 percent rut that had prevailed from 2010 through 2016 gave way to closer to 3 percent growth in 2017, a pace that expect to be sustained in the coming year.”
Stanley used to work as a former researcher at the Richmond Federal Reserve.
- Secular Stagnation Becomes Passé: In recent years, the FOMC and financial economists have come to accept the 2 percent economic growth rut as inevitable. Forecasts for 2018 have been raised by a few tenths on the back of the passage of tax cuts, but the consensus forecast for next year (as well as the FOMC median) is still only 2.5 percent. In fact, real growth may be over 3 percent in 2018, possibly the best year since 2003.
- Business Investment Takes Off in Response to the Tax Plan: Foes of the tax bill have suggested that the business tax breaks would merely lead to another round of stock buybacks and dividend payments. I would argue strongly that firms will invest more, as they will be more inclined to expand operations in the U.S. rather than abroad and will purchase more plant and equipment thanks to the full expensing provision of the tax bill as well as increasingly tight labor markets.
- Consumer Moves from Starring Role to Best Supporting Actor: With business investment surging to the lead role in driving the expansion, it is easy to forget about the consumer. However, household demand remains strong and should continue to be a solid contributor to growth in 2018. I have real consumer spending penciled in for a rise of just over 2.5 percent in 2018, but given the robust performance of consumer outlays in recent months, this projection feels very conservative.
- Labor Market Reaches Very Thin Air: I look for job growth to remain solid in 2018, driving the unemployment rate below 4 percent in early 2018. By the end of next year, I expect that the jobless rate will be at its lowest level since the 1960s. Year-over-year pay gains should approach 3 percent in 2018, marking the fastest growth in nearly a decade.
- Inflation Will Exceed 2 Percent: I do accept that there are important secular forces that are helping to tamp inflation down, including the Amazon effect, the Google effect and technological advances. Those forces are not going to disappear and they will prevent a full-on breakout of higher prices, but they will eventually be overwhelmed by an economy that is overheating.
- Fed to Raise Rates Four Times: Heading in 2018, the financial markets are only willing to price in two hikes next year. I expect the FOMC to hike four times next year. My economic forecast calls for strong growth, a tightening labor market and a pickup in inflation, which would presumably be sufficient to justify my four-hike projection.
- Federal Reserve Remodeling: 2018 will bring major change at the Fed. Traditionally, when bank presidents retired, their replacements were promoted from within the bank or at a minimum from within the Fed system. In recent years, however, bank presidents such as Harker, Kaplan, Bostic and most recently Thomas Barkin at Richmond, have come from outside the Federal Reserve system…and do not have what had become the standard economics PhD degree. The “new” Fed is likely to be less dovish, less model-driven and more flexible in its communications than the old regime.
- No Encore from Congress in 2018: The tax reform bill just completed by Congress is a once-in-a-generation achievement, and it will not be replicated in 2018. Between the implementation of the tax cuts and continued relief on the regulatory side, there will be ample support to the economy coming from the federal government.
- Treasury Supply Matters Again: Unfortunately, a confluence of forces is coming together to create a perfect storm for government borrowing [rate hikes that will raise the government’s borrowing costs, growth in entitlements as baby boomers retire, higher defense spending, hurricane cleanups, tax cuts and quantitative tightening]. The federal government’s net borrowing requirement for FY 2018 may exceed $1 trillion, easily the highest since 2012.
- Global Monetary Policy Begins to Normalize: The Fed is certainly well on its way, finally, toward a more normal monetary policy stance, and a few other key central banks (the Bank of England and the Bank of Canada) have taken a few tentative steps in that direction. The European Central Bank is expected to end its QE program by the end of the year, and the Bank of Japan is expected to take a tentative step or two as well.