January 2018 U.S. Economic Outlook

Robert A. Dye, Ph.D.

,

Daniel Sanabria

Macro shot of graph on a screen

As we look ahead to 2018 and beyond, we see that the U.S. economy is generating more consistent momentum.



2018: Out from the Shadow of the Great Recession

With the end of 2017 came a noteworthy anniversary. December 2017 marked ten years since the onset of the Great Recession. One generalized conclusion from Reinhart and Rogoff’s masterpiece, This Time is Different: Eight Centuries of Financial Folly, is that it can take about 10 years for an economy to recover from a severe financial crisis. While there is no calendar to check off milestones of crisis and response, that ten-year time span feels about right. So we can think about the U.S. economy in 2018 less in terms of recovery from crisis, and more in terms of what can foster positive momentum, what is sustainable and what is not.

As we look ahead to 2018 and beyond, we see that the U.S. economy is generating more consistent momentum. We still have a good shot at three consecutive quarters of 3 percent or more real GDP growth beginning in 2017Q2. It would be the first such winning streak in this expansion. We will get the first estimate of 2017Q4 real GDP growth on January 26. In addition to more consistent U.S. momentum, global economic demand is improving. Europe and Japan are both gaining momentum after years of underperformance. With the recent passage of tax reform, U.S. fiscal policy is stimulative. If Congress can cobble together an infrastructure spending program as promised, that could add to fiscal stimulus later this year. Although interest rates are gradually rising, monetary policy remains accommodative. The Federal Reserve has so far raised short-term interest rates from exceptionally low, to merely very low. Also, the crisis-driven regulatory response is easing. We expect to see more examples of regulatory rollback this year.

Productivity growth is key to sustaining a long expansion. We define productivity as real output per hour of all nonfarm private-sector employees. It tends to be cyclical, often peaking at the end of recessions after labor has been shed and output starts to ramp up. It often declines ahead of recessions as businesses hire more workers to keep up with growing demand. So far in this expansion, productivity growth has been weaker than expected. However, through the first three quarters of 2017 productivity growth improved, with 2017Q3 registering 1.5 percent year-over-year productivity growth -the strongest since 2015Q2.We expect the recent reforms to the corporate tax code to be positive for business investment, and therefore positive for productivity growth. Productivity growth is the key lever that will determine if wage growth is inflationary or not. Strong productivity growth allows businesses to pay higher wages with-out raising their prices. Otherwise, wage growth can lead to higher inflation which could cause the Federal Reserve to raise interest rates more than expected, which can eventually lead to the next recession.

What is not sustainable? Reinhart and Rogoff offer a master class in the dangers of rapid debt accumulation. Also, financial bubbles are non sustainable. The recent rallies in both the U.S. stock market and in Bitcoin add to the “wall of worry.” Mismanaged government finances are not sustainable. The Soviet Union, Greece and Zimbabwe are modern examples of self-imposed fiscal crises that led to collapse and chaos.

We expect to see an ongoing economic expansion for the U.S. in 2018, helped by rest-of-world growth, expansive fiscal policy and restrained monetary tightening. Productivity growth will be a key sustaining element of the U.S. expansion. By mid-year we will see the second-longest U.S. expansion ever, reaching 107 months in May.

For a PDF version of this report click here: USEconomicOutlook_0118.  



The articles and opinions in this publication are for general information only, are subject to change, and are not intended to provide specific investment, legal, tax or other advice or recommendations. The information contained herein reflects the thoughts and opinions of the noted authors only, and such information does not necessarily reflect the thoughts and opinions of Comerica or its management team. We are not offering or soliciting any transaction based on this information. We suggest that you consult your attorney, accountant or tax or financial advisor with regard to your situation. Although the information has been obtained from sources we believe to be reliable, neither the authors nor Comerica guarantee its accuracy, and such information may be incomplete or condensed. Neither the authors nor Comerica shall be liable for any typographical errors or incorrect data obtained from reliable sources or factual information.

January 8, 2018
Robert A. Dye, Ph.D., Senior Vice President and Chief Economist at Comerica Bank

Robert A. Dye, Ph.D.

Senior Vice President and Chief Economist
Daniel Sanabria, Senior Economist at Comerica Bank

Daniel Sanabria

Senior Economist

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