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US Economic Outlook: Q3 2018

August 2018

US real GDP growth forecasts have been upgraded to 2.5-2.9% in 2018 and 2.3-2.9% in 2019. Fiscal stimulus is the key contributor to the faster growth. The strong economic conditions have also added to rising inflation, which is expected to moderately overshoot the Federal Reserve’s 2% target over 2018-2019. Financing conditions remain loose, despite the continuing tightening of monetary policy. Private sector confidence remains high, though it appears to have peaked

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Optimistic Short-term Outlook, Mediocre Long-term Growth

We have upgraded US GDP growth forecasts to 2.5-2.9% in 2018 and 2.3-2.9% in 2019. Fiscal stimulus is the key contributor to the faster growth over 2018-2019, adding 0.5-0.7% growth annually. This comes from a combination of tax cuts and increases in federal government spending in recent congressional bills.

The strong economic conditions have also contributed to rising inflation, which is expected to moderately overshoot the Federal Reserve’s 2% target over 2018-2019. 

Financing conditions remain loose, despite the continuing tightening of monetary policy. Private sector confidence remains high, though it appears to have peaked. 

Beyond the short-term fiscal stimulus effects, we expect long-term factors such as workforce ageing and slower productivity growth to dominate after 2020, leading to annual GDP growth of 1.1-2.1% over 2021-2025.

Baseline forecast probability: 20-30% at a 1-year horizon.

Baseline Outlook

Optimistic Short-term Outlook, Mediocre Long-term Growth
The US Economy, 10 Years After the Start of the Global Financial Crisis

Forecast Risks

Rising Risk of a Major Trade War
Pessimistic and Optimistic Scenarios

Consumer Spending and Confidence

Strong Consumption Growth, But Consumption Level Remains Below Trend

Investment and Labour Productivity

Investment Spending Relative to GDP Still Below the Pre-crisis Level
Slow Productivity Growth Due to Mix of GFC Effects and Pre-GFC Problems

Labour markets, Wages and Household Income

Employment Below Pre-crisis Level Despite Record Low Unemployment
Wages Have Not Kept Up with Labour Productivity Increases
Wages Have Not Kept Up with Labour Productivity Increases
Stagnating Incomes, Higher Inequality, Lower Consumption growth

Monetary Policy and Financial Conditions

Interest Rates are Low, but Credit Standards Still Tighter than Pre-GFC
Household Sector has Deleveraged, but Corporate Debt Rising
Household Sector has Deleveraged, but Corporate Debt Rising
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