Elliot Eisenberg, Ph.D.
Entering 2017, the domestic economic landscape is solid, and while there is an increased likelihood of volatility with President Trump in the White House, the risks to the forecast are slightly to the upside. This is because the proposed combination of personal and corporate tax cuts, increases in infrastructure and defense spending, reduced regulatory burdens and the likely repatriation of hundreds of billions in overseas corporate cash are all expected to boost economic activity and inflation in 2017.
However, there are also definite economic headwinds. It is highly likely that Congress will reduce the size of any tax cuts and spending increases sought by President Trump, blunting their impact. In addition, legislation takes time to pass and, after passage, there will be lengthy lags before the money begins to impact the economy. Also, the already rising dollar will hurt manufacturing activity by raising the cost of exports. Lastly, any attempt to slap tariffs on imports is fraught with the risk of precipitating a trade war, which has obvious negative growth implications.
With all this uncertainty in mind, I expect full-year 2017 GDP to come in at 2.3%, slightly higher than the 1.9% growth experienced last year and the 2% average rate of growth since the end of the Great Recession. Headline inflation looks to pick up from roughly 1.5% to near 2% in 2017, while core inflation (which excludes food and energy) will edge up, but only slightly. Because of the slow rise in inflation, the Federal Reserve will have the luxury of time to raise the federal funds rate from where they are now, at 0.625% to, at most, 1.375% by year end, with a rate increase coming roughly every three months and starting no earlier than June.
Turning our attention to the labor market, I expect net new monthly job growth to average 160,000/month, which, while down, from 188,000/month in 2016, is excellent given that we are late in the business cycle and there are relatively few potential workers still on the sidelines. Thus, the unemployment rate will probably fall from 4.6% today to 4.3% or possibly 4.2% by year end. As the labor market tightens, nominal wage growth should increase further in 2017 with average annual wage increases rising from 2.4% to as much as 3%: a healthy rise.
Because of better GDP growth and falling unemployment, 10-year Treasuries will end 2017 at 2.70%, and the rate on 30-year mortgages will be 4.6% as the yield curve rises and steepens due to faster rising long-term rates. But, continued easing of credit conditions and rising consumer spending due to continued good employment and wage growth will keep the economy and housing market on track.
Housing starts should increase by about 7.5%, to 1.25 million. Single-family starts will likely total 850,000, up from 760,000, while multifamily starts should hit 400,000, up from 390,000. New and existing home sales should collectively rise by about 3% and end the year at 6.15 million, with mortgage purchase volume advancing by $100 billion and refinance activity falling by about $400 billion due to the rise in mortgage rates. Housing inventories will, regrettably, remain unchanged, and combined with limited new home building, home prices will rise by 5%. Lastly, I put the chances of a recession in 2017 at a low 15% to 20%.
Elliot Eisenberg, Ph.D. is President of GraphsandLaughs, LLC and can be reached at Elliot@graphsandlaughs.net. His daily 70 word economics and policy blog can be seen at www.econ70.com. You can subscribe to have the blog delivered directly to your email by visiting the website or by texting the word “BOWTIE” to 22828.