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Economic Forecasts

Weak First Quarter Likely to Test Fed

Kiplinger's latest forecast for the GDP growth rate

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GDP 2.1% growth in ’17, following 1.6% in ’16 More »
Jobs Hiring pace should slow to 175K/month in '17 More »
Interest rates 10-year T-notes at 2.4% by end '17 More »
Inflation 1.6% 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 September More »
Housing 6% price growth by end of '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 first quarter is likely to come in at only 1% on an annualized basis when the Commerce Department reports the numbers on April 28. Why? Consumer spending took a breather after a fourth-quarter surge last year. Also, a warm January and February hurt spending on utilities, while snowstorms on the East Coast in March caused motor vehicle sales to tumble and overall hiring to slow. Federal government spending is likely to have dropped in the quarter, too.

The Federal Reserve will need to see a rebound in the economic data for April and May in order to continue with its rate-hiking program at its June 14 meeting. While we expect second-quarter growth to accelerate after a slow start to the year, if that doesn’t pan out, the Fed will delay its next hike until it is sure things are back on track.

Look for GDP growth of 2.1% for 2017 as a whole, well below the 3% to 4% target that President Trump wants to hit. The fact is, it will take time for Trump’s policies to make a difference on the growth front.

See Also: All Our Economic Outlooks

His proposed tax cuts could have the quickest influence on the economy if adopted right away. But they probably won’t be in place this year. Plus, as demonstrated by the 2001 and 2003 tax cuts by President George W. Bush, consumers tend to use initial tax savings to pay down debt. Increased individual spending, which boosts GDP growth, tends to come later.

Trump’s proposal for extra infrastructure spending probably won’t be approved by Congress until sometime in fiscal year 2018, which starts this October. Even then, it will take months for the money to be spent. Getting the necessary permits can delay infrastructure projects even longer.

Meanwhile, rising interest rates will act as a drag on growth. Strong consumer spending, driven by wage and employment gains plus the buoyant stock market, is likely to be the main pillar supporting the economy this year.

We do expect GDP growth in 2018 and 2019 to be spurred by the fiscal stimulus of tax cuts and infrastructure spending. Instead of the 2.2% growth we previously forecast for those years, we now look for the economy to expand by 2.5% to 3%, depending on how much of Trump’s program is approved and whether Congress enacts spending cuts to reduce the deficit.

GDP grew by 2.1% on an annualized basis in the fourth quarter of 2016. Exports fell and imports rose, causing a drag on the growth rate of 1.8 percentage points. Better news came from business spending on inventories, which added a full percentage point. That’s a sign of business confidence. Most of the rest of GDP growth came from consumer spending, which increased by 2.5%. That was lower than in the previous two quarters, but still a decent number. Construction of new housing also showed strength. But business spending was modest, with an increase in equipment purchases nearly matched by a decline in new construction of industrial buildings and power plants.

Another modest piece of good news was that spending on mining equipment and structures rose for the first time in two years. Federal government spending declined because of a big drop in defense outlays, but state and local government construction jumped, so total government spending rose.

See Also: The Trump Effect on Financial Markets

Source: Department of Commerce: GDP Data