US: Growth and policy caution – Wells Fargo

Analysts at Wells Fargo Securities explain that given the complexity and conflicting interests on the policy issues of US health care, tax reform and trade, we continue to expect that any initiatives will impact the economic outlook sometime after 2017.  

Key Quotes

“Once again, 2017, as in prior years, economic growth started the year with a slow start, as we anticipate below a one percent gain on overall GDP growth. The rest of 2017 is expected to come in at 2.3 percent on average. Real final sales will be supported by steady growth in consumer spending. Household spending will be supported by continued gains in employment and wages/benefit gains. In addition, a surge in consumer confidence will also support a steady consumer spending outlook. These “soft” data do not stand alone, but are supported by the hard data of jobs and labor compensation gains.”

“Government spending will add to overall economic growth as spending picks up at the federal level, but we expect that state and local government spending gains will be limited by the rising cost of transfer payments and pensions.”

“Trade remains a drag as the growth of real imports will exceed that of real exports. For the global outlook, we anticipate stronger growth in 2017 for Japan, Canada and Brazil relative to 2016. We do not anticipate a recession in 2017 for Mexico.”

“Inflation and Interest Rates

• Inflation, as measured by the PCE deflator, will continue to persist near or above the FOMC’s 2 percent target. The FOMC has indicated a tolerance for a range of inflation outcomes around the 2 percent target, therefore giving the FOMC additional flexibility. Core PCE increases reflect continued rise in services (health care, housing) and a more modest drag from non-food/energy goods. 
• We anticipate that the FOMC will increase the funds rate in June and again in the second half of this year. Benchmark two- and 10-year U.S. Treasury rates are expected to rise modestly with the spread narrowing as the year progresses. The rising interest rate environment will not halt the expansion.” 

“Profits and the Dollar

• A pick up in the employment cost index along with continued modest top-line nominal GDP growth indicates a modest improvement in economic profits in 2017. However, nonfinancial profit margins have peaked and this represents a challenge going forward for continued business investment and hiring in the face of a cyclical decline in profit margins. 
• We expect the trade-weighted dollar will continue to appreciate in 2017 as U.S. short-term rates rise. This represents a continued challenge to any attempts to reduce the U.S. trade balance. The United States currently runs a trade deficit with China, Europe, Mexico and Canada, with the China deficit exceeding Europe, Canada and Mexico combined.”