Economic Outlook 2018

When looking ahead to 2018, we really have three sets of questions to ponder. The first is how well the goals of the new administration were met. The second is the question of how well the economy really did in 2017, and third is the question of how well the 2018 economy will do. As an ancillary question, how much of that success (or failure) will be rooted in what happened in 2017?

The stated goals of the Trump administration were unrealistic, but there is nothing new about this. Part of the challenge for any new administration is that disillusionment sets in rapidly.

At least five major goals were outlined in the campaign that became policy initiatives when the Trump team took power. There was going to be a total rewrite of the Affordable Care Act; there was going to be a complete rewrite of the tax system; most of the major trade pacts were either going to be abandoned or significantly changed; there was going to be a wholesale movement away from regulation and bureaucracy that had been deemed anti-business; and there would be a $1 trillion spend on infrastructure. Only one of these has come to fruition in close to the form anticipated as there were major changes in the tax system.

In the beginning there was the usual enthusiasm that comes with a new team. It was called the “Trump bump,” and there was response in the stock market as well as in the overall economy. In truth, much of the improvement in the job market and the overall growth rates had started during the previous year as the economic drivers rarely mesh with the political calendar.

The excitement had mostly worn off by the middle of summer. As the tax bill started its climb, a great deal of friction ensued and the end result is not quite what had been advocated by most in the GOP a year or so earlier. Against all odds, the economy started to boom. The second quarter numbers were above 3.0 percent growth, and the third quarter was even better at 3.3 percent. This is almost a half point higher than the long-term average has been since the end of the recession in 2009. There were two prime reasons for that growth, and they continue to be the motivators going forward. The first and probably the most important was the recovery of the U.S. export market. The second factor leading to growth in 2017 was the emergence of the “old” U.S. consumer ― the one that uses their credit card loosely, the one with the confidence to make long-term purchases, and the one willing to do some less-than-frugal spending.

Several obvious changes already have started to impact the outlook for the year: the tax changes, the Fed’s statement regarding the fate of interest rates, and the growth spurt that took place at the end of 2017. Corporate income tax rates have been reduced from 35-39 percent to 20-22 percent, and income tax rates have been reduced as well. The expectation has been that the tax changes will stimulate growth dramatically, but few economists are really expecting it to be that dramatic simply because the economy is pretty healthy now with 4.1 percent joblessness and growth over 3.0 percent for two and likely three quarters. This would have been a much more effective piece of legislation two or three years ago when the economy still needed stimulus. Today the fear is that a big surge could stimulate too much and create an overheating situation toward the end of the year.

If the economy does start to heat up, the Fed will feel additional pressure to hike rates. It already has indicated that there will be three raises in the coming year, but right now each of these hikes is slated to be a quarter point,which leaves the rates at around 3.0 percent by the end of 2018. If the economy overheats, those quarter-point hikes become half-point or three-quarter-point hikes, so we could see a rate of 4.0 percent or more at the end of the year.

Unemployment is not expected to change appreciably this year. It is at 4.1 percent now, and that is very close to the low levels set prior to the recession. There is nothing to suggest that this will change much. Wages have not gone up, and they usually do when less labor is available. This time the employers are not finding the people they want to hire, and they are not paying them extra.

The issues of trade will likely come to a head this year. NAFTA negotiations have been acrimonious and are expected to remain so. The Mexican elections are coming up this year, and the talks could play a role. The U.S. will also try to push China harder, but as long as the U.S. needs the Chinese to keep North Korea from starting World War III, there is a limit to how hard they can be pushed.

By and large, the expectation for 2018 is positive, but there is more confidence in that assessment at the start of the year than for the end.