By Paul Single
- Economic indicators flashing green, geopolitics a concern
- Tax cuts a positive, but exact effects are still unknown
- Consumer confidence rising as stock market surges ahead
The economy finished 2017 in good shape, achieving a so-called “Goldilocks” performance of neither too hot nor too cold. Economic growth topped 3.0% in the middle two quarters and is also expected to be strong for the recently concluded quarter. The unemployment rate is at 4.1%, a 17-year low; inflation is stable and below the Fed’s target rate of 2.0%, and consumer confidence is at its highest since the early 2000s. Meanwhile, the global economy is on an upward swing, which is boosting our exports; and recent reductions in corporate taxes should help future growth.
With all the good news, the big question for many investors is: “How long will this last?” Unemployment is expected to continue falling and should pierce the 4.0% level in the first half of 2018 (see chart). There has not been a “3” handle on the unemployment rate since 2000. Inflation has been a relatively low 1.5% (see chart) and is expected to move toward the Fed’s target level of 2.0%, but not much above it. Consumer confidence, which is closely linked to stock market performance, is expected to continue riding the upward trend in equities.
We see two possible caveats to this optimistic outlook. First, geopolitical risks are high. The U.S. is at loggerheads with North Korea, and Saudi Arabia is going through a consolidation of power. Finally, there are concerns with Russia and the Baltic States, China and territorial disputes, and the United States with its protectionist trade views.
The other caveat surrounds new tax policy. It will provide an economic boost, but how much? We expect it to increase GDP in 2018 by 0.4% (in total). Half of that will come from the tax cuts and half will come from higher federal spending. Those who were strong supporters of the plan expect much more growth. We think growth will be moderately higher due to increased capital spending, which will drive economic growth to higher levels.
Read the next article in this series: Bull Market in U.S. Equities Likely to Continue
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