Out with the old, in with the new; despite one’s party leanings, the changing of the guard at the White House telegraphs the fact that the next four years will not be business as usual – or boring!
The high degree of uncertainty was exemplified by the recent spike in the Chicago Board Options Exchange (CBOE) Volatility Index (VIX). The popular measure of Wall Street fear recently jumped to its highest level in more than three months as the stock market retreated amid concern over the new administration’s controversial executive order aimed at tightening U.S. immigration rules.
There is a strong likelihood that these types of shocks/events will become more commonplace in 2017. The situation whereby the House, Senate and the Executive Branch are all controlled by Republicans allows for swifter and more disruptive changes to economic linked policies that had been established under Democratic control during the previous administration.
Throw into the mix that President Trump is not a career politician and has populist policy leanings, and things get really interesting in a hurry. What exactly will happen with the direction of economy in 2017 remains to be seen. What is known however; is the fact that any significant economic policy changes in the Trump administration will not likely have any material impact on the economy until the second half or latter part of the year.
Gross Domestic Product: Our thesis last year stated that the economy would be healthy but just not as healthy as most other economists were predicting. The general consensus called for real GDP at a level of 3 percent or higher for 2016, while we expected the level to be in the 2 percent to 2.5 percent range, the actual real GDP number came in at 1.6 percent (see Figure 1), even below our estimation.
Moving forward, we believe that 2017 will be another year of growth, slightly better that 2016, but again very muted growth. In our estimation, real GDP should hover near 2 percent with the potential to be slightly lower.
The demographics of lower population growth and an aging population will keep a lid on economic growth in the U.S. for some time. The good news is the U.S. is not nearly as critically disadvantaged demographically as Europe and Japan with their chronologically challenged populations. The consumer will again drive the majority of GDP expansion. The same concerns or headwinds to GDP growth from last year will follow through into 2017:
- The U.S. export market is highly uncertain with the strength of the dollar likely staying solid against most other global currencies given our anticipated scenario of higher interest rates. This causes our exports to remain relatively more expensive compared to other globally traded goods and services.
- Overall, government spending will be constrained. Given the new administration’s likely penchant for a smaller government, there will be little additive support to real GDP from the government in 2017.
- What might actually help GDP growth in 2017 ‑ other than consumer spending ‑ could occur late in the year. New federal policies enacted to cut corporate and personal taxes, coupled with new infrastructure spending programs, could add to the GDP bottom line. It will take time however, to pass and implement these programs. The earliest impact of significant policy shifts would not likely be felt by the economy until the second half or later in 2017.
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Inflation: Labor shortages will push wages and core inflation (excluding food and energy) higher from 2.3 percent in 2016, to 2.5 percent in 2017, and thus retard overall job growth.
Energy prices have stabilized and West Texas Intermediate (WTI) crude prices have begun to find support above the $50/barrel level. The U.S. Energy Information Administration (EIA) is forecasting an upward bias to current prices, coupled with a high degree of uncertainty regarding the potential volatility of price movements in 2017.
Given the expected push toward higher energy prices, headline inflation could push above 3 percent by the end of the year, up from 1.9 percent at the end of 2016. Inflation nearing 3 percent will be the linchpin for the FED to raise rates. The FED will not be able to successfully suppress interest rates to below inflation levels, which would lead to at least two expected rate hikes in 2017.
Interest rates: At the beginning of 2016, the market anticipated three FED rate hikes. The premise for this belief was the expectation of higher inflation levels such that the FED would have to “put the brakes” on the economy in order to keep prices under control.
What actually happened was an economy that purred nicely along such that everything was healthy but not nearly as strong (in terms of real GDP growth), thus resulting in only one rate hike at the end of the year in December.
Going forward, the FED has hinted at the necessity of three rate hikes in 2017. The market, however, is more cautious this year and is anticipating only two rate increases. We would echo this sentiment of the likelihood of needing only two rate increases in 2017.
As previously mentioned, the lukewarm economy should actually give the FED a great deal of wiggle room for deciding when and by how much they raise rates. The real concern would be the classic case of an overheating economy, where there is “too much money chasing too few goods,” such that prices begin to rise rapidly in what is known in economics as demand-pull inflation. and this just isn’t in the cards for 2017.
Unemployment: Job growth will persist quietly in 2017 (much like the expected tepid growth in GDP), such that the unemployment rate will gradually fall to an average annual rate of 4.5 percent from the expected final level of 4.7 percent unemployment in 2006.
Jobs will continue to be created in the service and professional industries compared to the government and manufacturing industries. The immediate hiring freeze by President Trump on all nonessential governmental jobs in his first week of office certainly sends the message that job openings (growth) in the federal government will not be as plentiful as the private sector. The economy should add approximately 2 million jobs in 2017, which equates to an average of 167,000 new job additions per month.
We are now beginning the eighth year of economic recovery in Michigan. Since the recession low point in the summer quarter of 2009, to the summer quarter of 2016, net job growth has occurred at an average annual rate of 71,600 jobs.
The final number of net jobs created in 2016 should closely approximate the longer-run average with an estimated 69,000 net new jobs (a continued strong year of job growth for Michigan).
Heading into 2017, strong job growth will likely take a bit of a breather, but not too much of a breather. The pullback in jobs is indicative of a tightening labor market, which is being experienced throughout much of the nation.
Expected modest national economic growth in GDP will signal similar modest GDP growth in the state, which should translate into new job gains of 41,600 in 2017.
As mentioned in last year’s write-up, if jobs expand by the forecasted amounts for 2016 (69,000) and 2017 (41,600), that will take Michigan employment back to the same level as spring 2003. Which is good news considering how hard the state was hit during the Great Recession with such widespread unemployment.
The same sectors that generated new job growth in 2016 will provide continued support in 2017. They are the sectors of professional and business services; construction; trade, transportation and utilities. Manufacturing jobs will likely see headwinds in 2017, with no gains expected. This will also coincide with a projected slowdown in the national sales of autos and light trucks. Stability in the economy, historically low interest rates and lower gasoline prices have fueled robust sales growth year-over-year since the recession ended in 2009, See Figure 2.
U.S. auto and light truck sales eclipsed 18 million units in December, a level that hasn’t been seen since July 2005. Given the expectation of higher interest rates in 2017, firmer energy prices, and a maturing market, sales should retreat modestly from 17.5 million seasonally adjusted annualized level in 2016, down to 17.3 million units in 2017.
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