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Economic Outlook for 2017: More of the Same?

January 24, 2017

By Denise Rondini

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LAS VEGAS -- The outlook for the U.S. economy is expansion at a pace around trend through 2019, according to Bill Strauss, senior economist and economic advisor, Federal Reserve Bank of Chicago.

Speaking at Heavy Duty Aftermarket Dialogue ahead of Heavy Duty Aftermarket Week, he said he also expects:

  • Employment to rise moderately with the unemployment rate remaining very low
  • The slack in the economy to disappear, which will lead to a gradually rising inflation rate
  • An increase in manufacturing output at a rate below trend in 2017 and 2018

Strauss began his presentation by reviewing what he said at HDAD in 2016. He said he was close on three of his four conclusions. But the fourth, manufacturing output, which he previously had expected to grow at a rate slightly below trend in 2016, actually saw no growth. He attributed this to the value of the U.S. dollar, which caused exports to suffer because the cost of U.S. manufactured goods was higher in foreign markets.

Going forward, he said, “I do not know the impact the new administration will have on the economy. There are lots of uncertainties.” He added that the Federal Reserve does not make assumptions when setting its policies but rather relies on data, so the Fed will have to wait to see what changes are made by the new administration before making any moves of its own.

He did say that a group made up of 50 blue chip companies has not altered its outlook on the economy, predicting 2017 to be a little better than 2016 but not substantially better. “However, there is upside risk that economic growth numbers could be higher,” Strauss said.

According to Strauss, the Federal Open Market Committee expects GDP to grow at around trend over the next three years. He is expecting final numbers for 2016 to come in at 1.8% to 1.9% growth and 2017 to be at 1.9% to 2.3%. Followed by 2018 at 1.8% to 2.2% and 2019 at 1.8% to 2.0%.

While employment increased in 2016, he said we are still short of where we should be in terms of employment numbers and what is happening “is poaching of employees from other businesses.” Typically when this happens wages and benefits rise, but this is not currently happening. FOMC expects the unemployment rate to be just below its natural level of 4.6% through 2019, according to Strauss.

He believes slow productivity growth helps explain why relatively strong employment growth has not translated into higher incomes.

Moving on to inflation, Strauss said it has increased from a year ago, and he expects inflation to continue to rise in 2017. “Food, energy or a combination of the two are what is pushing the inflation rate,” he said.

FOMC anticipates that personnel consumption expenditure inflation will be at 2% over the next three years. And what they call core PCE inflation (which excludes food and energy) will reach 2% by 2018 from its 2016 level of 1.7% to 1.8%.

Looking at manufacturing output, Strauss said things are flat compared to a year ago but that “some sectors like energy have been hammered.”

Industrial production is expected to improve in 2017, but at a pace that is below its historical rate. The Blue Chip IP Forecast calls for 2.5% growth in 2017 and 2.3% growth in 2018.

In concluding his remarks, Strauss said that, “monetary policy has been very aggressive, keeping the Fed Funds very low since December 2008.” He added that the Federal Funds Rate is expected to reach the neutral rate at the end of 2019.

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