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Economic Forecasts

Goldilocks GDP Growth: Not Too Hot, Not Too Cold

Kiplinger's latest forecast for the GDP growth rate

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GDP 2.1% pace in '17, 2.4% in '18 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 1.3% in '17, down from 2.1% in '16 More »
Business spending Rising 3%-4% in '17, after flat '16 More »
Energy Crude trading from $40 to $45 per barrel in September More »
Housing 5.5% price growth by end of '17 More »
Retail sales Growing 3.5% in '17 (excluding gas) More »
Trade deficit Widening 4% in '17, after nearly flat '16 More »

GDP growth should pick up to an annual pace of 2.5% or so in the final three quarters of 2017, leaving growth for the full year at about 2.1%. In other words, the economy is doing OK, but not great. However, this middling growth rate may keep the inflation rate from heating up, according to Joel Naroff of Naroff Economic Advisors, giving us a Goldilocks economy: not too hot, not too cold.

Consumer spending should grow by 2.5%, underpinned by rising household wealth and income, job gains and the increasing use of credit. Motor vehicle sales will slow this year because of higher rates on auto loans. And solid consumer spending will cause imports of goods to rise faster than exports, which will lower U.S. GDP a tad.

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Business equipment investment will bump up by 3%, though recent declines in crude oil prices are suddenly threatening investments in the capital-intensive energy sector. Spending on commercial structures is expected to rise by 9%, although the oil and gas sector could drag this down a bit if energy prices keep falling. Home building should grow by 6% in 2017. Builders are working as fast as they can, given the high demand for new homes and inventory shortages.

Government spending is likely to hold flat, and thus contribute nothing to GDP growth. Federal hiring is no longer under a complete freeze, but is likely to be extremely slow. Part of the difficulty is the lack of political appointees at the middle management level, who could approve new hires. State and local governments are being cautious with their spending plans, given the uncertainty of federal funding for Medicaid and other programs supported by Uncle Sam.

2018 GDP growth is likely to be 2.4%. 2018 is an election year, which suggests that there will be some voter-pleasing tax cuts or extra federal spending to help boost the economy. However, the size and impact of any such tax or spending package is likely to be modest. And if political gridlock derails plans for fiscal stimulus in Congress, then 2018 growth will be roughly the same as in 2017: about 2.1%.

The Federal Reserve will likely continue its rate-hiking program with an increase in December, and several more next year. The Fed won’t wait for better GDP growth as it carries out its plan to boost the short-term federal funds rate (to 3% by 2020 from 1.25% now), unless the economy slows sharply. The Fed’s rate hikes will push up the bank prime lending rate to 6.25% by 2020, weighing on auto sales and other consumer spending that is financed with short-term interest rates. However, the long-term rates on which mortgages are based are likely to stay low as long as inflation remains tepid, which we expect to be the case for some time to come.

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Source: Department of Commerce: GDP Data