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Economic Forecasts

Goldilocks GDP Growth: Not Too Hot, Not Too Cold

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 1.4% in '17, down from 2.1% in '16 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 3.5% in '17 More »
Retail sales Growing 3.5% in '17 (excluding gas) More »
Trade deficit Widening 4% in '17, after nearly flat '16 More »

GDP growth in the second quarter bounced up to 2.6%, returning to a level that we expect will continue for a while. Economic expansion in the second half of 2017 should run at an annual pace of 2.5% or so, leaving growth for the full year at about 2.1%. In other words, the economy is doing OK, but not great. However, this middling performance may keep inflation under control, according to Joel Naroff of Naroff Economic Advisors, giving us a Goldilocks economy: not too hot, not too cold.

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

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

Government spending is likely to be flat, except for defense spending, and thus contribute little to GDP growth. Federal hiring is no longer under a complete freeze, but will remain extremely slow. Part of the difficulty is the lack of political appointees at the middle-management level of the federal government, who approve new hires. State and local governments are being cautious with their spending plans, given the uncertainty of federal funding for Medicaid and other programs supported by Uncle Sam.

2018 GDP growth is likely to be 2.4%. 2018 is an election year, which suggests that there will be some voter-pleasing tax cuts or extra federal spending to help boost the economy. However, the size and impact of any such tax or spending package is likely to be modest. And if political gridlock derails plans for fiscal stimulus in Congress, then 2018 growth will be roughly the same as in 2017: about 2.1%.

The Federal Reserve will likely continue its rate-hiking program with an increase in December, and several more 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 that is financed with short-term interest rates. However, the long-term rates that mortgages are based on are likely to stay low as long as inflation remains tepid, which we expect to be the case for some time to come.

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Source: Department of Commerce: GDP Data