Even before the US tax cuts took effect, consumption spending rose at a 3.8 per cent annualised rate in the final three months of 2017 and business investment was up a robust 6.8 per cent.
The strong momentum should lift GDP growth in the first quarter of 2018 close to 3.0 per cent. In February, Congress also passed a Budget Act that raises fiscal spending above the previous spending caps for two years. We have thus increased our estimate for 2018 growth from 2.4 per cent to 2.6 per cent, and for 2019 our forecast rises from 2.3 per cent to 2.4 per cent.
Government spending rose only 0.1 per cent in 2016-17 but the new budget scraps a scheduled USD140 billion spending reduction for 2018 and 2019. Our raised GDP forecast for this year reflects consumer spending increasing to an expected 2.8 per cent but is offset by a large deterioration in net exports, which we now think will subtract about -0.4 percentage points from GDP growth.
We do not expect employment growth of much more than 1.3 per cent in 2018 compared with 1.5 per cent last year. That will limit how quickly GDP in the private sector grows, but higher productivity should rise and demand should outpace output in both 2018 and 2019 as tax cuts boost after-tax income for households and businesses.
Imports will rise more rapidly than exports, generating a larger trade deficit, but that will draw off upward pressure on inflation. We now expect consumer price inflation to average 2.3 per cent in 2018, up from our previous estimate of 2.1 per cent, mainly because of higher oil prices.
The slowdown in real wage gains in 2017 did not slow real consumer spending. Instead, the personal savings rate fell – from close to 6.0 per cent of disposable income in early 2016 to 2.4 per cent by the end of 2017.
But we expect the squeeze on real wages to abate modestly this year as nominal wage gains rise from 2.5 per cent to 2.9 per cent, outpacing inflation.
In our view, without the tax cuts, the US economy's growth would probably have decelerated in 2018. Real income growth was insufficient to sustain above trend increases in real consumer spending, particularly with the saving rate so low. The tax cuts will lift disposable income about 0.6 per cent in 2018, boosting household finances enough to increase real spending while allowing saving to rise modestly.
The budget bill suspends the government’s debt ceiling until March 2019 and increases the caps on discretionary spending for 2018 and 2019 – USD1,065 billion and USD1,091 billion – by roughly 14 per cent. However, the newly-authorised spending increases will increase US budget deficits: we’ve raised our estimates from USD717 billion to USD772 billion for this year and from USD906 billion to USD975 billion for 2019.
Given the economy's stronger growth momentum and the Budget Act, we are also changing our forecast for interest rates. Instead of two quarter-point hikes by the Federal Reserve, in March and September, we now – if financial markets permit – expect another in June and still forecast a similar increase in March 2019 too.
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The following analyst(s), economist(s), or strategist(s) who is(are) primarily responsible for this report, including any analyst(s) whose name(s) appear(s) as author of an individual section or sections of the report and any analyst(s) named as the covering analyst(s) of a subsidiary company in a sum-of-the-parts valuation certifies(y) that the opinion(s) on the subject security(ies) or issuer(s), any views or forecasts expressed in the section(s) of which such individual(s) is(are) named as author(s), and any other views or forecasts expressed herein, including any views expressed on the back page of the research report, accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Kevin Logan
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