RCF Vice President Peter Bernstein is a member of the Philadelphia Federal Reserve Society of Professional Forecasters.
Second Quarter Rebound Puts Economy Back on Trend
After growing at only a 1.2 percent annual rate in the first quarter of 2017 the economy rebounded to grow at 3.0 percent in the second quarter. For the first half of the year, real GDP increased at a 2.1 percent rate, in line with the post-Great Recession trend. Positive signs going forward include stronger business investment and solid growth in exports, helped in part by the weaker dollar. One area of concern, however, is consumer spending which has been growing faster than consumer’s disposable income for some time. The added spending has resulted in a notable drop in household savings which ultimately could put a damper on spending unless income growth increases. Yet, despite continued growth in employment, wages are still not increasing much faster than inflation.
The Trump administration is in the process of revealing its tax plans, which presumably will call for reductions in both corporate and personal tax rates. Lower taxes would be expected to boost growth, but in all likelihood they will increase the government’s budget deficit. Fiscal concerns may ultimately limit the scope of any tax cuts, and any increased government borrowing could siphon away funds from the private sector. As such, we are not expecting much of a boost from tax cuts and as a result and we have not altered our long-term forecast of moderate economic growth over the next two years.
More important to the economy’s performance could be the impact of international trade. Despite anti-trade/protectionist rhetoric from the President, U.S. exports and imports have grown solidly so far in 2017. As noted earlier, a weaker dollar has helped exports, which have also benefitted from a pick-up in growth in Europe and China. But perhaps the deeper message is that international trade has become so integrated within the U.S. economy, and become so important to American businesses both here and abroad, that on this issue, the administration’s bark may be worse than its bite.
Economic growth is projected to improve during the rest of 2017 and into 2018. We see the economy slowing in 2019, as higher interest rates and slower growth in employment take effect. Already shortages of qualified workers are showing up in some industries. One area where we have become less optimistic is housing. While we still expect new residential construction (housing starts) to rise, the increase is now expected to be slower than previously projected. Sales of new homes tumbled in July, 10 percent below their level a year ago. As long as people aren’t buying new homes, builders will be less inclined to add more to the housing stock.