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Economic Forecasts

Harvey Likely to Slow Q3 GDP, Push Q4 Up

Kiplinger's latest forecast for the GDP growth rate

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GDP 2.1% pace in '17, 2.4% in '18 More »
Jobs Hiring pace should slow to 175K/month by end '17 More »
Interest rates 10-year T-notes at 2.4% by end '17 More »
Inflation 2.0% in '18, up from 1.6% in '17 More »
Business spending Rising 3%-4% in '17, after flat '16 More »
Energy Crude trading from $40 to $45 per barrel in December More »
Housing Existing-home sales up 1.3% in '17 More »
Retail sales Growing 3.8% in '17 (excluding gas) More »
Trade deficit Widening 4% in '17, after nearly flat '16 More »

Hurricane Harvey’s effect on Houston and the Texas Coast is likely slowing third-quarter U.S. GDP growth by 0.3 percentage points to a 2.5% rate because of lost economic activity. But the storm’s aftermath will raise growth by at least as much in Q4, if not more, because of rebuilding and car replacement. Lost economic activity includes missed retail sales, industrial production, transportation, and general business activity for the better part of two weeks, and reduced operations for more. However, residents will need to repair up to 100,000 houses and replace tens of thousands of automobiles, and Houston will need to ship or truck in tons of freight to replace what was lost.

GDP growth in the second quarter of 2017 was revised up to 3.0%, as consumers picked up the pace after a poor first quarter. Growth for the full year should be about 2.1%.

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Consumer spending in 2017 should grow by 2.8%, underpinned by rising household wealth and income, job gains and the increasing use of credit. But motor vehicle sales are slowing this year. And solid overall consumer spending should cause imports of goods to rise faster than exports, which lowers U.S. GDP a tad.

Business spending has improved, with a strong jump in computer purchases, although low crude oil prices are suddenly threatening investments in the capital-intensive energy sector. Commercial structure construction is expected to rise by 9%. Business spending on inventory was flat in the second quarter, indicating room for growth in the second half of the year.

Home building should rev up, given the shortage of homes for sale. The second quarter saw a decline, but only because the warm winter pulled some starts forward.

Government spending is likely to be flat except for defense, and thus contribute little to GDP growth. Federal hiring is no longer completely frozen, but will remain extremely slow, partly because of the dearth of middle-management political appointees who approve new federal government hires. State and local governments’ spending plans are cautious, given the uncertainty of federal funding for Medicaid and other programs supported by Uncle Sam.

GDP growth in 2018 is likely to be 2.4%. Next year is an election year, suggesting that some voter-pleasing tax cuts or extra federal spending to boost the economy are on the horizon. However, the size and effect of any such measures will likely be modest. And if congressional political gridlock derails fiscal stimulus plans, then 2018’s growth will be roughly the same as 2017’s: about 2.1%.

The Federal Reserve is expected to hike interest rates this December and several times next year. The Fed will regard current GDP growth as strong enough to justify its plan to boost the short-term federal funds rate to 3% by 2020 (from 1.25% now), unless the economy slows sharply. The Fed’s rate hikes will push up the bank prime lending rate to 6.25% by 2020, weighing on auto sales and other consumer spending financed by short-term interest rates. However, the long-term rates that set mortgages are likely to stay low if inflation remains tepid, which we expect to be the case for a while.

See Also: The Trump Effect on Financial Markets

Source: Department of Commerce: GDP Data