Macroeconomic monthly outlook: 2017 starting slow, expect US GDP below 1% gain

U.S. Overview

Experience matters. We began 2017 with the assumption that economic policy would be slow to evolve and that aggregate economic activity would differ little from the trend of recent years. Given our legislative experience and our assessment of the complexity and conflicting interests on policy issues of health care, tax reform and trade, we decided to wait until policy initiatives became clearer before altering our trend economic forecast.

Once again, 2017, as in prior years, looks likely to begin with a slow start, as we anticipate below a one percent gain on overall GDP growth. The rest of 2017 is expected to come in at 2.3 percent on average. Real final sales (graph below) will be supported by steady growth in consumer spending and an improvement in business equipment spending and structures over the 2016 pace. Government spending will add modestly to overall economic growth while trade remains a drag.

Inflation, as measured by the PCE deflator, will continue to persist near or above the FOMC's 2 percent target, and we anticipate that the FOMC will increase the funds rate in June and again in the second half of this year. Benchmark two- and 10-year U.S. Treasury rates are expected to rise modestly with the spread narrowing as the year progresses.

A pick up in the employment cost index, along with continued modest top-line nominal GDP growth, indicates a modest improvement in economic profits in 2017.

We expect that the trade-weighted dollar will continue to appreciate in 2017 as U.S. short-term rates rise.

International Overview

The global economic outlook has continued to improve as recent economic weakness has given way to more certainty regarding economic prospects. However, some uncertainties remain in place, especially those related to global trade, which was one of the most important drivers of economic growth during the first decade and a half of this century. One of these uncertainties has to do with the new U.S. administration's talk against international trade. However, we have seen that the Trump administration's position regarding trade seems to have changed or morphed into a more benign view about the changes needed for trade to benefit the U.S. economy. That is, it seems that the changes being sought on the North American Free Trade Agreement (NAFTA) are more cosmetic right now and the changes do not seem to represent a threat for the trade agreement's survival. This is a breath of fresh air in the discussion regarding international trade, which has been one of the political issues that have generated great uncertainty for the global economy during the last year or so.

A second uncertainty has been the United Kingdom's decision to exit the European Union (EU). In March, the United Kingdom finally triggered the clause to leave the EU, a process that will likely take two years. Furthermore, the United Kingdom has been looking into the possibility of negotiating a free trade agreement with the United States and will probably need to do the same with many other countries as it reorients its external trade policy as an "independent" country.

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