US NABE Outlook: GDP to Rise While Inflation Softens in 2018

--Expect Rate Hike in December to Push FFR to 1.375% in 2017

--Weakening Pricing Pressures Pushed Inflation Down in 2017

By Sara Haire

     WASHINGTON (MNI) - U.S. business economists are expecting 2018 GDP growth

to rise, while expectations for inflation has mildly softened from September,

according to the National Association of Business Economics December 2017

Outlook Survey.

     The median forecasts for the average annual inflation-adjusted GDP growth

for 2017 was unchanged from September at 2.2%, while growing 0.2pp to 2.4% for

2018. Median forecasts for the fourth quarter of 2017 GDP growth rose to 2.7%

from 2.5% in September.

     The core PCE price index, the Fed's favored inflation measure, is expected

to see a 1.4% rise on a Q4/Q4 basis in 2017, down from the 1.9% and 1.5%

estimates in June and September, respectively. Panelists are expecting a 1.8%

expected growth year-over-year for 2018 core PCE inflation, down slightly from

the estimated 1.9% in the previous survey. The report suggesting "weakening of

pricing pressures as the year has progressed" to be to blame for the downward

revisions.

     However, the Beige Book survey following the October/November FOMC meeting

stated "price pressures have strengthened..." since the previous report,

suggesting inflation could be on an upward path for the future, closer to the

Fed's target of 2%. 

     The NABE panelists did not change their expectations seen in September

about the federal funds target range reaching 1.375% by the end of 2017,

suggesting an expected 25 basis point rate hike at the December meeting.

However, the forecast for 2018 has flattened, with a year-end rate of 1.983%,

down from the 2.125% projected in September.

     The tax bill passed in the House and another version passed in the Senate

early Saturday morning. Now House and Senate Republicans will have to hold a

conference where a compromise bill will be negotiated for Trump to sign,

something he is hoping to do before Christmas.

     The panelists, surveyed from November 6th through the 15th, expected tax

reform to occur quickly, with 84% of panelists expecting individual tax cuts to

be enacted by the end of 2018, with 76% expecting it to happen within the first

quarter of 2018. 82% of those surveyed also anticipate the corporate tax reform

to be signed, sealed, and delivered by the end of 2018, with 76% expecting it to

occur in the first quarter of 2018.

     Despite a rise in panelists expecting legislation on tax reform to occur by

the end of 2018, only 35% of those surveyed expect that an infrastructure

spending plan will be in place by the end of 2018, far below the 61% seen in the

September survey. 37% of panelists are not expecting to see an infrastructure

spending plan enacted during this presidential term.

     The NABE panel's median outlook for corporate profit growth in 2017 jumped

to 6.2% from 5.0% in the September survey, however the range of forecasts is

rather wide, according to the survey.

     Panelists forecast nonfarm payroll growth will average about 167,000 jobs

per month in 2017, slower than the 178,000 pace expected in September, most

likely due to the disruption of the hurricanes in August and September. The

current forecast of monthly gains is lower than the actual 187,000 seen in 2016.

They also foresee a further slowdown to 158,000 jobs per month next year, an

indication that panelists are expecting the market will soon reach full

employment if it has not already.

     Even though there is a slower job growth projection, panelists expect the

unemployment rate for 2017 to average 4.4%, while the 2018 forecast is expected

to fall to 4.1%, even down from the 4.2% expected in September.

     The median forecast for hourly compensation growth in 2017 fell to 2.0%,

down from the 2.3% in September. However, with a lower unemployment level and

slower job growth, panelists are expecting hourly compensation in 2018 to see a

jump to 3.0%, with "wage growth outpacing inflation (PCE) in both years."

     Despite a bump in hourly earnings to be expected, the growth in real

consumer personal consumption expenditures for the next two years is expected to

slow down to 2.8% in 2017 and then further to 2.5% in 2018.

     The panelists' expectations for 10-year Treasury yields slid slightly in

this survey to 2.45% at year-end, compared to the 2.49% yield expected in the

September survey. The panel expects a further drop to average 2.3% in 2018.

--MNI Washington Bureau; +1 212-800-8517; email: sara.haire@marketnews.com

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