US: Economic outlook not especially contentious - Westpac

According to Richard Franulovich, Research Analyst at Westpac, the outlook for the US economy this year is not especially contentious – the economy is near full employment, business and consumer confidence are at multi decade highs and tax cuts are washing over the economy.

Key Quotes

“The median FOMC forecast is for a solid above trend 2.7% growth rate in 2018. Private sector forecasters agree, the latest Bloomberg median forecast at 2.8%.”

“The median FOMC and private sector projection for 2019 and 2020 are in broad alignment too, both calling growth to ease, the FOMC 2019 and 2020 median at 2.4% and 2.0% respectively, while the Bloomberg median is 2.5% and 1.9% respectively.”

“The outlook for 2019 and 2020 is however arguably more contentious than these medians imply.”

“Influential Fed centrists Williams (soon to be NY Fed President) and Dallas President Kaplan have weighed in on the debate. Last week they both reiterated an upbeat message for 2018 but sounded curiously cautious thereafter. Kaplan cautioned that the tax boost would fade in 2019, slowing growth to 1.75%-2.0% in 2020, putting him at the lower end of the central tendency.”

“Williams did not speak to 2019 specifically but did note that the “tax cuts are front-loaded” and that optimism about r-star is misplaced.”

“In a similar vein, the relentless easing in US financial conditions has come to an end as well. US financial conditions are not tight, but the mix of choppy equity values in recent weeks, wider credit spreads, higher mortgage rates, yield curve flattening, a higher in the USD and higher LIBOR-OIS wholesale funding rates have all finally produced a measurable turning point in US financial conditions.”

“Labour productivity seems to be linked to growth in the US capital stock too. Any lift in the supply side potential of the US economy stemming from tax cuts would imply a more enduring positive growth impact than the aforementioned studies too.”

“A lower growth baseline for 2019/2020 versus 2018 fits the signal from the modest tightening in financial conditions and various studies that point to a fading fiscal boost in these years. That said there is a plausible wide range of outcomes.”