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November 2017 U.S. Economic Outlook

November 6, 2017
By Robert A. Dye, Ph.D., Daniel Sanabria

Debts and Taxes

The globally synchronized economic expansion will continue through year-end 2017. U.S. real GDP grew at a 3.0 percent annualized rate in the third quarter of 2017, or 0.7 percent quarter-over-quarter. The European Union increased real GDP by a similar 0.6 percent quarter-over-quarter in Q3. China claims 6.8 percent real GDP growth in Q3 on a year-over-year basis, roughly consistent with a strong 1.7 percent growth quarter-over-quarter. Japan is expecting about 0.5 percent quarter-over-quarter real GDP growth for Q3. Commodity countries are doing better as commodity prices increase. As the global expansion continues, so does concern about debt accumulation, which is both a symptom and a cause of the current benign economic environment. Rising debt levels in Asia have drawn warnings from global economic institutions, including the World Bank and the International Monetary Fund.

Accompanying the synchronized global expansion, there is a synchronized monetary policy normalization. The U.S. Federal Reserve looks all but certain to raise the benchmark fed funds rate range again on December 13. It has begun the process of reversing the substantial crisis-driven increase in its balance sheet. We expect the Powell Fed to raise rates again in 2018. The Bank of England just raised its benchmark bank rate for the first time in a decade, while the European Central Bank will reduce its asset purchases in January, but have not yet proposed a tapering strategy.

For most developed countries, including in the U.S., inflation remains weaker than expected. Oil prices have firmed recently, but remain well below earlier expectations. In the U.S., tighter labor markets are expected to lead to further wage gains, potentially stoking more inflation later. But the global forces of disinflation and outright deflation remain strong. Among these are lower population growth, better agricultural production, globalized trade, ever-cheaper computing power and the ever-increasing zero marginal cost economy. 

The U.S. awaits tax reform. The House of Representatives bill is now in the hands of the Senate, which will use the reconciliation process to try to pass something before the end of this year. There has already been pushback on limiting the mortgage interest deduction and eliminating the state and local tax deduction. Some experts warn that the proposed 20 percent corporate tax rate is too low and will destabilize the federal budget deficit, potentially making our federal debt unsustainable. We believe that the Senate will be under enormous pressure to do something and that the final tax bill will retain the broad contours of the House plan. Failure of tax reform could result in a reset of current high business and consumer confidence. 

An infrastructure bill for 2018 remains on the Trump Administration’s wish list. The final infrastructure bill will be dependent on tax reform. We expect to see something featuring public-private partnerships and possibly asset sales.

For a PDF version of this report click here: US_Economic_Outlook_1117.

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