The U.S. economy should finish 2016 with final GDP growth figures of 1.6-1.7%.1 This is hardly a barn burner, but has been a continuation of the slow, steady growth seen for several years. Current 2017 forecasts estimate GDP in the 1.8-2.2% range.2 However, it would be wise to note that projections for future years have been somewhat optimistic since the recovery. For example, The Wall Street Journal Economics Survey of December 2015 predicted 2.6% GDP growth for 2016. We will have to wait and see how 2017 compares to the expectations.
The market will continue to focus on earnings, interest rates, inflation, and taxes as we move into 2017. The year should keep analysts busy given the talk of significant changes to the tax structure. President Elect Trump is proposing the lowering of personal and corporate taxes for most people and companies. In addition, a proposal to allow U.S. companies to move foreign earnings held abroad back to the United States as a special, lower tax rate will be worth watching. This proposal could bring back hundreds of billions of dollars to the United States.
Governmental spending at the state and local levels has been constrained by increased pension and healthcare costs for many areas of the country. This has limited the spending of these local entities for other programs. It is hoped that Trump stimulus programs could be a positive for state and local governments. It is likely that such stimulus programs will contribute to the national debt. Specific policy proposals will allow analysts to determine the probable effects of both spending and debt increases at that time.
Inflation and rising interest rates are areas to watch for as a drag on 2017 GDP. A ¼ point rate increase (0.25%) by the Federal Reserve in December is widely anticipated. Two further ¼ point increases in 2017 (as is anticipated) would bring the federal funds rate to 1.0% by year end. Housing markets are expected to see less appreciation as a result. Moving the national average for mortgage interest rates from 4% to 5% still leaves this rate historically low. However, it is also a 25% increase in borrowing costs. For example, a mortgage of $300,000 costs the borrower $12,000 annually at 4%. It jumps to $15,000 annually at 5%. This is enough of a change to price some buyers out of their local markets. The national real estate average shows price growth of about 6% last year. Markets like Portland, Seattle, and Denver have seen much greater price rises. Expectations are for these markets to slow their growth as buyers reassess what they can afford.
At the same time, the combination of full employment and likely increasing energy prices is expected to increase inflation in 2017. Businesses are expected to raise wages, and prices, as they compete for skilled workers. OPEC agreements to limit pumping are expected to hold and help drive up oil prices somewhat. It is hard to gauge exactly how much impact any of these factors will have on next year’s economy, but all are expected to play a part.
The financial markets seem to be very confident that better economic news is just around the corner. They seem sure that tax cuts and increased infrastructure spending is a done deal, despite any definitive proposals. Some businesses are anticipating a reduction in regulations they have previously complained of. The new optimism seems to be based on recent proposed appointments of anti-regulation proponents and the creation of the most conservative cabinet in decades. The markets appear to be anticipating profits to be made from the changes these individuals – as well as other likely cabinet picks – would like to make to sectors of our economy. New government policies, even with one party firmly in control, take longer to implement than most people expect. Ideas get watered down and projects can take years to become shovel ready.
The United States has been governed by a Republican Congress and President 22.5% of the time since the early 1900’s. The Dow Jones Industrial Average has returned approximately 7% annually during those time frames.2 Markets don’t like uncertainty. They began to move after the election results became clear and investors could trade based on likely governmental policy changes. A number of analysts feel 2016 is finishing with some of next year’s expected gains already priced into the system. We will have to wait and see which of these expectations become reality, and which have been unrealistic hopes. It is certain that 2017 will be a year with some interesting changes to adapt to, and, hopefully, profit from.
We wish everyone a happy, enjoyable holiday season as we all reflect on 2016 and mull over the possibilities of 2017.
http://news.morningstar.com/articlenet/article.aspx?id=784381; Economy Not as Strong as Consensus Believes, Robert Johnson 12/10/2016
Bob Brinker’s Marketimer, 12/5/2016, Vol 31, No. 12