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Economic Forecasts

The Economy Is on a Roll

Kiplinger's latest forecast for the GDP growth rate

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GDP 2.6% pace in '18, up from 2.2% in '17 More »
Jobs Hiring pace should slow to 175K/month by end '17 More »
Interest rates 10-year T-notes at 2.4% by end '17 More »
Inflation 2.1% in '18, up from 1.9% in '17 More »
Business spending Rising 3%-4% in '17, after flat '16 More »
Energy Crude trading from $50 to $55 per barrel in February More »
Housing Existing-home sales up 1.3% in '17 More »
Retail sales Growing 3.8% in '17 (excluding gas) More »
Trade deficit Widening 6% in '17, after nearly flat '16 More »

The economy steamed ahead in the third quarter, growing by 3.3%, despite hurricanes that battered the Southeast and U.S. territories during the quarter. Although the storms reduced spending on both home and business construction, a surge of new-car buying took place in September as Texas flood victims replaced damaged vehicles.

The economic momentum should continue into the fourth quarter, with 2.7% growth. Consumer spending is likely to remain strong, given the jump in consumer sentiment surveys in October. Business investment in equipment is picking up. And extra spending to repair damage from the hurricanes will continue to boost the economy. Tens of thousands of houses still need to be repaired, and tens of thousands of vehicles need to be replaced. Houston alone will need to ship or truck in tons of freight to replace what was lost.

Expect a pickup in growth to 2.6% in 2018, after 2017’s 2.2% full-year pace. Beyond momentum, the economy likely will get an extra boost when congressional Republicans pass their tax plan. Rising household wealth and income, further job gains (albeit at a reduced rate), and credit utilization are underpinning consumer spending. However, expect motor vehicle sales to slow significantly once flood-related replacement buying tapers off.

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2018 will also be a good year for business spending, with a high level of equipment purchases and increasing business construction. Spending on inventories will rise as well. Home building should rev up, given the shortage of homes for sale relative to demand from would-be buyers.

Government spending is likely to stay flat, except for defense, and thus contribute little to GDP growth. Federal hiring is no longer completely frozen but will remain extremely slow, partly because of the dearth of middle-management political appointees who approve new federal government hires. State and local governments’ spending plans are cautious, given the uncertainty of federal funding for Medicaid and other programs supported by Uncle Sam.

The Federal Reserve is expected to hike interest rates on December 13 and twice next year. Despite the low 1.4% inflation rate for core consumer items, the Fed will decide that GDP growth is strong enough to justify boosting the short-term federal funds rate to 3% by 2020 (from 1.25% now), unless the economy slows sharply. The Fed’s rate hike will push up the bank prime lending rate to 6.25% by 2020, weighing on auto sales and other consumer spending that is financed in the short term. However, the long-term rates that finance mortgages are likely to stay low if, as we expect, inflation remains tepid.

See Also: The Trump Effect on Financial Markets

Source: Department of Commerce: GDP Data