Upbeat Forecasts on Domestic Economy

The domestic economy ended 2016 on a modestly upbeat note. U.S. real (adjusted for inflation) gross domestic product (GDP) increased 1.9% in the fourth quarter of 2016, according to the initial estimate by the Bureau of Economic Analysis. While this was a deceleration from 3.5% in the third quarter, it was still better than the 1.0% growth rate recorded in the first half of the year.

The post-recession recovery has lasted seven and one-half years, long by historical standards, leading some to wonder whether the economy is running out of steam. And what will the arrival of a new president and a GOP-controlled Congress have on the economy’s prospects?

While we at First Fiduciary are investment managers and not forecasters, it’s useful to look at mainstream predictions for 2017. The good news is that consensus forecasts point to a domestic economy that is expected to grow at the modest rate experienced after the Great Recession, which was 2.1% annually. The Federal Reserve projects that the nation’s GDP will expand 2.1%, while the Congressional Budget Office and the Conference Board  estimate that GDP will expand at a pace of 2.3% in 2017.

As is typical, most of the growth in output in the coming year is expected to be driven by consumer spending. And importantly, the labor market should be strong.

The Federal Reserve estimates that the unemployment rate will remain at approximately 4.5% through 2019, and that the positive trend in wage growth will continue.

In December, the Federal Reserve raised short-term interest rates by 0.25% and indicated that it expected three more rate hikes of a similar magnitude during 2017. That said, interest rates are still low by historical standards, and any future increases will depend on the strength of the economy and financial market conditions. It is unlikely that the Fed will want to put the brakes on an economy that’s growing so modestly.

That brings us to the wild card: Washington. It’s unclear at this point how the policies of the new administration will impact economic growth, but the initial response to Trump’s victory, evidenced by the significant market rally since the election, has been positive. In fact, most forecasters believe his pro-business stance will be beneficial for economic growth. At First Fiduciary, our investment process is politically-agnostic. We invest in shareholder-friendly companies with sustainable competitive advantages and track records of navigating many different political and economic backdrops. For that reason, we believe our companies will enjoy success over the long-term, regardless of how governmental policy is ultimately shaped.