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It is tempting for forecasters to predict a slowdown in 2018 to a ‘more sustainable’ growth path of around 2.0%, given general pessimism about the potential growth rate of the US economy due to aging, dismal productivity growth and zombie firms, as well as the headwinds resulting from gradual Fed tightening.
Consensus estimates of the leading forecasters currently predict growth of 2.3%, which is exactly what we have seen over the past three years. Given this rather bland steady-as-she-goes outlook, we are tempted to say that the risks are actually on the upside right now. Economic momentum has continued to strengthen throughout the year and labor markets are tight, while tax reform is likely to boost effective demand, which looks inevitable given that the US president has had so little legislative success so far.
Are there risks? Of course, there always are. One might be that a new and improved Fed will prove more hawkish than it is now. No fewer than three FOMC monetary policy committee positions are currently vacant, with Chair Janet Yellen’s term ending in February 2018. President Trump has announced his intention to appointed the centrist Jerome H. Powell as the new Fed chair, but this still leaves open the other positions to be filled. In general, monetary policy is decided by majority vote, which makes any radical change unlikely.
What’s more, the fact that inflationary developments continue to be favorable mean there is little reason as yet to implement monetary tightening in 2018, at a point no more than two steps after the modest rate hike of December 2017.
Another risk specific to the US, is that the threat of impeachment could dampen ‘animal spirits’. This risk will likely only become critical after the 2018 Congressional elections, if the Republicans lose their majority in the House of Representatives. In that sense, the main risk to the growth outlook is the rise of protectionism as illustrated by the difficult negotiations surrounding NAFTA.
All in all, in 2018, US economic growth could easily surprise on the upside.
This article forms part of the Robeco 2018 outlook entitled Playing in Extra Time.