The U.S. Had Strong Momentum Ahead of the Storms
|U.S. Overview
The U.S. Had Strong Momentum Ahead of the Storms
The U.S. economy had strong momentum prior to the devastating back-to-back hurricanes, which impacted parts of Texas and most of Florida in late August and September. Damages from the hurricanes will likely total around $150 billion, with an unusually large portion of that coming from business interruption to refineries, petrochemical plants, restaurants and residential construction.
Damages to property impact the stock wealth but damages from lost sales and production will impact real GDP. After expanding at a 3.1 percent pace in the second quarter, we expect real GDP growth to slow to a 2.1 percent pace in the third quarter, with the hurricanes shaving about 0.9 percentage points off Q3 growth. We look for output to bounce back relatively quickly, with real GDP expected to rise at a 2.5 percent pace in Q4 and expand 2.4 percent in 2018.
We are still expecting to see some sort of tax cut enacted but the magnitude will be less than has been proposed and the timing will likely be a bit later. We have shifted impact of the tax cuts into the second quarter of 2018, assuming passage of a $1.6 trillion cut over ten years in early spring of next year.
At this stage of the business cycle, tax cuts would largely play a supporting role. Consumer spending and business fixed investment would be stronger than otherwise. Without the cuts, 2018 growth would be closer to 2 percent.
We are holding onto our expectation that the Fed will raise the federal funds rate by a quarter percentage point in December.
International Overview
More Balanced Growth from the Global Economy
Although economic growth in the global economy remains well off the pace registered during the first decade and a half of this century, it has been solid enough to push central banks of large developed countries outside of the U.S. to start considering their own response to years of extremely expansionary monetary policies. The recovery seems especially significant in the all-important manufacturing sector, with manufacturing PMIs hitting heights not seen in many years. In the United States, the ISM manufacturing index hit 60.8 in September, the highest reading since May 2004 when it was 61.4 and was the highest reading of that cycle. Meanwhile, the Eurozone PMI reading for September was the highest since late 2011, at 58.1. That is, the manufacturing PMI in the Eurozone shows further improvement in the region's manufacturing sector.
Interestingly, what makes this strengthening in the manufacturing sentiment in the U.S. as well as in the Eurozone is that the recovery has not been accompanied by a strong manufacturing PMI in China.
Thus, although economic growth in this environment will be weaker than what the global economy experienced since the emergence of China as a global growth engine, the economic environment seems to be more balanced and potentially more sustainable than the environment that existed when China was pulling the strings of economic growth across the global economy.
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