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Today, SIFMA unveiled the results of the twice annual survey of the chief U.S. economists of many of SIFMA’s global and regional firms, which forecasted that the U.S. economy will strengthen to 2.9 percent for the remainder of 2018.
“The current outlook for 2018 is significantly stronger than the Roundtable’s 2017 year-end prediction of 2.5 percent,” said Michael Feroli, Chief U.S. Economist, JP Morgan Chase and chairman of SIFMA’s Economic Advisory Roundtable. “Fiscal policy was an important consideration in the upgraded forecast. We are now keeping a closer eye on monetary policy, which is generally expected to remain on a path of gradual tightening.”
The Economy:
The median mid-year forecast calls for 2018 gross domestic product (GDP) to grow by 2.9 percent on both a year-over-year basis and on a fourth-quarter-to-fourth-quarter basis, stronger than the 2.5 percent year-over-year and the 2.3 percent fourth-quarter-to-fourth-quarter predicted in the 2017 year-end survey. For 2019, the mid-year forecast calls for GDP to grow by 2.6 percent year-over-year.
Employment is expected to continue improving, and on a slightly stronger basis than expected at end-2017. Survey respondents predict the unemployment rate to average 3.9 percent in 2018 (compared to 4.0 percent in the end-year 2017 survey), falling to 3.6 percent in 2019. Expectations for job growth were also stronger, with employers expected to add 2.2 million workers to payrolls in 2018 (from 2.1 million expected in the end-year 2017 survey) and 1.8 million in 2019.
The forecast for 2018 “headline” inflation, measured by the personal consumption expenditures (PCE) chain price index, also strengthened to 2.2 percent in the mid-year survey from the end-year 2017 forecast of 1.8 percent. For 2019, the PCE chain price index was expected to be 1.9 percent.
Monetary Policy:
Respondents were unanimous in their expectation that the Federal Open Market Committee (FOMC) will raise the Federal Reserve’s target rate range by 25 basis points at the June 12-13, 2018 meeting to 1.75 to 2.00 percent from the current 1.50 to1.75 percent range.
Two-thirds of respondents expect a total of three additional rate hikes in the remainder of 2018 (inclusive of a June rate hike), with the remaining third expecting two hikes. For 2019, respondents were divided on the number of rate hikes: the most often cited prediction was two rate hikes (36 percent), followed by three hikes (32 percent), four hikes (23 percent) and one hike (9 percent).
Survey respondents considered labor market conditions to be the most important factor in the FOMC’s decision to raise rates, followed by indicators of inflation pressure and inflation expectations.
Interest Rates:
When the survey was completed on June 1, 2018, the 10-year U.S. Treasury yield was 2.89 percent. The median survey forecasts for 10-year Treasury rates were: 3.00 percent for June 2018, 3.15 percent for September 2018, 3.20 percent for December 2018, 3.31 percent for March 2019 and 3.37 percent for June 2019.
Inflation and inflationary expectations, U.S. economic conditions and FOMC policy were the dominant factors cited impacting Treasury yields in the second half of 2018, followed by budget deficits trends/Treasury bond supply.
Risks to Growth: Fiscal Stimulus, Private Sector Investment and Patient Fed on the Upside; Trade, Geopolitical Crisis, Monetary Tightening on the Downside:
Larger than expected impact of fiscal policy boosting private sector spending combined with a patient monetary policy were the most often cited factors positively impacting U.S. economic growth.
On the downside, respondents noted concern about trade policy and possible geopolitical conflicts, closely followed by higher interest rates starting to bite or potentially high inflation leading to more aggressive tightening.
Policy Outlook:
The Administration has aired several potential policy changes, some of which are more likely to be realized than others. Overall, respondents were divided on the impact that the uncertainty regarding major government initiatives would have on GDP in 2018: a narrow majority (53 percent) expected no impact, 17 percent expected a positive impact to GDP growth, and 29 percent expected a negative impact to GDP growth.
Tax Policy:
All respondents considered the 2017 tax reform to have positively impacted full year 2018 GDP, with 30 percent seeing an impact of up to 25 basis points (bps), 59 percent seeing an impact of 25 to 50 bps, and the balance an impact greater than 50 bps. Respondents were more evenly divided over whether tax reform has increased the long-term potential growth rate of the U.S. economy. Although 58 percent believe it has not, the remaining 42 percent estimate that tax reform has raised the long-term potential growth rate by 22.5 bps.
Trade Policy:
Asked about when NAFTA negotiations would be completed, 61 percent of respondents expected a resolution in either 3Q or 4Q’18 and the balance in 2019. While the majority (74%) of respondents expect less than 50 percent chance of a U.S. withdrawal, 21 percent gave it a 50 percent chance and one respondent a greater than 50 percent chance. Most respondents, (74%) forecast a negative impact on GDP should the U.S. withdraw from NAFTA. Slightly more than half of respondents expect the impact from withdrawing from NAFTA would lower growth by up to 25 bps, with 25 percent expecting greater than 25 bps impact and 19% expecting no impact.
The full report is available at the following link: https://www.sifma.org/resources/research/us-economic-outlook-mid-year-2018/
