2017 US Economy: Trump—Bump or Slump?

“It depends,” says the two-handed economist. Blog contributor and GAI Consultants’ (GAI) Chief Economist Steven McDonald, CVA provides his outlook on the 2017 US economy.

On one hand, the general consensus tends to favor continued growth in 2017, which would propel the current US economy past the 100-month expansion mark (see my blog post titled “How Long Can the US Economy Continue to Grow?”) and place it in contention for the longest period of economic growth since WWII. On the other hand, plenty of risk and uncertainty remains, which is generally not a product of the transition of political power. Such risk and uncertainty also has most experts awaiting much needed clarity on US economic policy. But good or bad, changes will most likely only begin to impact the US economy in 2018 and beyond.

The 2017 US Economy—What We Can Expect

For now, I believe we can count on the following for 2017:

Modest US economic growth

Annual wage growth exceeding 3-3.5%

Early signs of an economy overheating as a result of relative full employment creating upward pressure on inflation

Proactive monetary policy as soon as inflation creeps towards the 2% target, with multiple interest rate hikes throughout the year

In short, we are in a great position to manage a healthy, growing US economy. In fact, today is one of the relatively rare times that an incoming US president has not been handed an economy already in a recession or headed towards one.

4 Threats to the 2017 US Economy

A recognized factor in maintaining the current momentum is the pure economic optimism created by the Republican Party victories in November. The anticipation of tax and regulatory reforms and indications of increased government spending on infrastructure have provided the stock market with a positive view toward future economic growth.  However, I believe that investor patience will be tested early in 2017, with the following risks to the 2017 US economy:

  1. Inflation
    So far, we have managed to grow with little pressure on inflation and the US dollar. Keeping the US economy on a growth trajectory will certainly impact those pressures in 2017.
  2. Economic Policy Uncertainty
    Two real possibilities include 1) the prospect of trade wars (particularly with China) and 2) tax cuts/increased government spending adding to the mountain of US debt.
  3. Irrational Exuberance” with Republican Control
    Borrowing from Alan Greenspan, American economist and former Chairman of the US Federal Reserve, the market (and consumers) may be placing too much optimism in some market ideologies. In fact, out of the 100 million jobs that the US economy has produced since WWII, 67% were under a democratic president and 33% were under a republican president.
  4. Global Economic Uncertainty
    Mainly Brexit and China. Chinese debt and overcapacity, along with a messy and confusing exit of the United Kingdom from the European Union, could push the global economy into a 2017-18 recession.

But risks aside, it is important to not underestimate the power of confident consumers. And given the strong economic foundations that currently exist, and hope alone that the current US political change will generate more growth, the 2017 US economy should continue on a positive trend.

McDonald-Steve-EMPhotoFor more information on economic research, analysis, and strategy, contact GAI Chief Economist Steven McDonald, CVA at 407.423.8398.

For related information, check out the following blog post:

How Long Can the US Economy Continue to Grow? | January 8, 2016

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