Although it is too early to call for a recession, it now appears that the current recovery is in the latter stages and nearing an end point. We are eight years into this recovery, and the forecast is calling for NO RECESSION in 2017. Please let me know if you would like a copy of the report, we would be happy to provide it to you. Below you will find the highlights from the forecast:
2017 U.S. Forecast
President Trump has voiced his goal to push economic growth up to 3 percent. To consider whether such a goal is achievable, one needs to examine the two components of long-run real
GDP growth: jobs and productivity. Job growth, for the foreseeable future, will be constrained by low unemployment as well as projected declines in the working-age population.
We believe that a realistic expectation of long-run real GDP growth is 1.6 percent—not the 3 percent growth that President Trump is seeking.
Any prospects for increasing productivity would come from tax reform or regulatory reform. The passage of any significant legislation, however, is in doubt. Since 1966, the average turnover in House seats for the mid-term elections during the first term of a presidency is 27 seats. This historical record points to a likely narrowing of the Republican majority in 2018. Given that expectation, the Democrats will do all they can to block any major legislation proposed by President Trump. As a result, we are not including any fiscal stimulus assumptions in this forecast update.
The other possible source of economic expansion is monetary policy. But there is no question that the Fed is in a tightening mode, as reflected by the increasing funds rate and a recent slowdown in money supply (M2) growth. We see an additional fed funds rate increase in September, which will cause the interest rate spread (the difference between long- and short-term rates) to narrow to 100 basis points. While that narrowing isn’t enough to suggest a recession is imminent, it does point to weakness in the ongoing recovery.
Our forecast update calls for real GDP growth of 2.3 percent in 2017. While this represents a pickup from the 1.6 percent growth registered in 2016, it is not the kind of growth that will fuel strong inflationary pressure. For a recovery that is one of the longest on record at eight years old, that is good news.
- With household net worth continuing to climb, consumer spending is forecasted to increase from 2.7 percent in 2016 to 2.9 percent in 2017.
- Capacity utilization is starting to pick up, pointing to additional investment spending this year. Higher investment spending will also be fueled by housing starts, forecasted to grow at a respectable rate of 10.8 percent.
- The balance of trade is forecasted to be pushed deeper in the red, a result, in part, of the declining value of the U.S. dollar.
- Housing appreciation, after dropping back to 5.6 percent in 2016, is forecasted to pick up to 6.6 percent.
- Inflation, as measured by the year-to-year change in the personal consumption expenditures price index, less food and energy, is forecasted to remain constant at 1.7 percent through year-end.
- Long-term interest rates, like the 10-year treasury bond, are forecasted to remain at current levels. But increases in the fed funds rate will push up other short-term interest rates. We see the 90-day treasury bill increasing about 50 basis points by year-end.
2017 California Forecast
Between 2013 and 2016, California job growth, on an annual basis, outpaced U.S. growth by about one percent per year. Looking at the quarterly data, however, reveals that the gap in job creation between the state and nation narrowed appreciably in 2016. Most of this narrowing was brought about by a sharp drop in information services jobs in Silicon Valley and declining job growth in the construction sector.
We believe the construction slowdown is temporary and expect a pick-up through year-end. The fall in high tech, however, will continue to be a dominant force, leading to a slowdown in California’s overall economy. The average annual pay for an information services worker in California is $131,000 versus $59,500 for all workers. So information services job losses have a much greater impact on aggregate income and California state tax revenue. These job losses appear to be related to the fact that Silicon Valley housing prices are among the highest in the nation. Workers are relocating to other technology hubs located in regions where housing is relatively more affordable. (This is discussed in more detail in the article on pages 22-24 of the Review.)
As can be seen in the table at the right, the impact of these Silicon Valley job losses will override the positive impacts of California’s other major engines of economic growth. Our forecast calls for California payroll job growth slowing from 2.6 percent in 2016 to
2.1 percent in 2017.
- In addition to real GDP growth in the U.S., the state’s economy will also be propped up by growth in U.S. imports. In the first quarter of this year, the most rapid import growth was from Mexico (7.3 percent), China (5.9 percent), and Japan (4.7 percent)—all well above the3.7 average for all imports. These rising imports are supporting job growth in transportation and warehousing and professional and business services.
- While construction activity was dampened early in the year, the low supply of unsold resale homes in California will help fuel a pick-up in residential permits through year end. Our forecast calls for permit growth of 4.4 percent in 2017, significantly higher than the 0.8 percent growth reported for 2016.
- While the low supply of homes will boost permit activity, this shortage, coupled with higher mortgage rates, is exacerbating the state’s housing affordability problem. California’s home price-to-income ratio is currently 5.8 versus a ratio of 3.3 for the nation.
- California’s home prices will continue climbing in 2017. Our forecast calls for housing appreciation of 6.5 percent versus 5.5 percent in 2016.