Optimism vs. Caution

It goes without saying that economic forecasting is not an exact science. As any statistician can tell you, there are two elements to a forecast: a point estimate, a prediction of where a certain variable, say GDP growth, will be in a year; and a range of uncertainty around that forecast. In economic forecasting, that range of uncertainty is large. Consumers, businesses and investors need to plan for the future, but we should recognize the risks. Economists have an old standby for the forecast narrative, “cautiously optimistic.” That sounds trite, but it’s a good description of the current outlook.

Then

Prior to the election, a growing consensus had emerged that the U.S. and global economies had entered a new normal. Labor force growth has slowed as the population has aged. Barring a sharp rise in immigration or an unprecedented surge in productivity growth, overall economic growth will be slower than in recent decades. The economic outlook has appeared a bit brighter in recent months, but demographic constraints will still be binding, despite post-election optimism.

Job growth is expected to remain relatively strong, but should slow as the labor market tightens. Wage growth should pick up a bit, but the benefit of low gasoline prices is fading fast. The housing market has further room for improvement, but results are expected to vary across the income scale. Motor vehicle sales appear to be flattening. Business fixed investment had been relatively soft in the past couple of years, but new orders for capital equipment began to turn up over the summer. The election resulted in a further boost for business optimism, strengthening capital goods orders and shipments into the new year. The global economy looks a little brighter.

And now …

After the election, the stock market was lifted by expectations of a large infrastructure spending program, consumer and business tax cuts, and a rollback of regulation. However, infrastructure spending will likely be a tough sell in Washington, as the House is reluctant to increase spending. Tax cuts seem likely, but the process may be constrained and delayed, as lawmakers focus first on the repeal and replacement of the Affordable Care Act. Congress is expected to decrease regulations, but the Trump administration has the option of reducing enforcement of rules currently on the books. Yet, the regulatory burden may not have been the drag on growth that many believe. When Congress does get around to working on tax reform, a key goal will be to fix how foreign earnings of U.S. firms are taxed.