Our updated forecast for Q3-2018 U.S. real GDP growth is 3.1%

Key Takeaways

• Our updated forecast for Q3-2018 U.S. real GDP growth is 3.1%. We expect federal spending to provide a strong boost to growth, while the contributions from trade and inventories flip roles from Q2.

• We have changed our 2019 fed funds call. We now expect three rate hikes in 2019, occurring in Q1, Q2 and Q3. As next year comes into view, we think economic conditions will remain strong enough for the Fed to continue hiking each quarter through Q3, eventually pushing the fed funds rate a bit above neutral.

• We expect longer-term Treasury rates to keep moving up as well. Our forecast for the end-of-year 10-year U.S. Treasury yield is 3.20% in 2018 and 3.60% in 2019. Robust net Treasury issuance and an end to the European Central Bank's asset-purchases should keep Treasury yields grinding higher.

• We have rolled out our initial macroeconomic forecasts for 2020. We expect U.S. economic growth to slow to 2.2% in 2020 amid fading fiscal stimulus and monetary policy that has moved from expansionary to modestly restrictive. Against this backdrop, we look for the Fed to remain on hold after the fed funds rate reaches 3.25% in Q3-2019 before eventually cutting rates 25 bps in Q4-2020.

U.S. Growth Outlook

Most recent real GDP growth forecast for Q3-2018: 3.1% (seasonally adjusted annual rate)

• Change since last Monthly Economic Outlook: -0.1 percentage points

• Commentary: Real GDP growth looks solid again in Q3. Inventories and trade could be bigger swing factors than usual amid the noise created by the recently enacted tariffs.

Real GDP growth forecast for full-year 2019: 2.8%

• Change since last Monthly Economic Outlook: -0.2 percentage points

• Commentary: Our forecast for 2019 economic growth largely remained unchanged. We still expect stronger growth in H1-2019 to give way to a gradual softening starting in the second half of the year.

Initial real GDP growth forecast for full-year 2020: 2.2%

• Commentary: Our initial forecast for economic growth in 2020 is 2.2%. The slowdown in 2020 relative to 2018 and 2019 is primarily driven by fading fiscal stimulus and monetary policy that we anticipate will have moved from expansionary to modestly restrictive.

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