US NABE Sees Continued GDP and Job Growth; Fiscal Less Certain

By Holly Stokes

     WASHINGTON (MNI) - While U.S. business economists raised their expectations

for both third and fourth quarter real GDP growth to 2.8% and 2.5% from 2.5% and

2.4%, respectively, in the previous survey, their forecast for 2017 real GDP

growth remains unchanged at 2.2% due to the anticipated drag from a weak first

quarter, a new survey from the National Association of Business Economics showed

Monday. 

     Panelists look for real GDP growth to accelerate to 2.4% in 2018

     September's survey of 47 business economists, which was conducted during

Hurricane Harvey and prior to Hurricane Irma, showed continued expectations for

GDP and job growth through 2017, along with high but dwindling expectations for

passage of tax reform and infrastructure plans by the end of 2018.

     Panelists' expectations for nonfarm employment growth remain unchanged from

June at 178,000 a month, just below 2016's actual 187,000 per month. They

believe that this modest slowdown in job creation will continue into 2018, with

the median forecast of 160,000 per month. 

     Despite this anticipated slowdown, the median forecast for unemployment is

slightly below that reported in June, now expected to be 4.4% in 2017 and 4.2%

in 2018. These unemployment rates are significantly lower than the actual 4.9%

rate in 2016.

     Since June, many panelists have lowered their inflation outlooks. Core PCE,

the Fed's preferred inflation index, is now expected to increase 1.5% on a Q4/Q4

basis, 0.4 percentage point lower than June's forecast. The median expectation

for aggregate and Core PCE inflation is projected at 1.9% in 2018, which would

be still under the Fed's 2% inflation target. Additionally, the 2018 CPI

inflation expectation has dipped from June's 2.3% forecast to 1.9%. 

     However, even with these slipping inflation forecasts, panelists do not

anticipate changes in the FOMC's trajectory for rate hikes. Those surveyed

expect the midpoint of the FFR to increase 25 basis point by 2017 years end, and

a further 75 basis point in 2018, meaning that the midpoint of the FFR at the

end of 2018 would be 2.125%.

     Despite continued optimism for GDP and job growth, there was a reversal of

risk assessment from June - with 48% of respondents now believing that the

balance of risks to the economy is weighted to the downside and 43% believing it

is weighted to the upside. 

     According to those surveyed, the top three downside risks to the economy

are trade protectionism, a substantial stock market decline, and immigration

restrictions - while the top three upside risks are stronger global growth,

corporate tax reform, and individual income tax cuts. Even with this shift in

risk assessment, the vast majority of panelists find that a near-term recession

is "highly unlikely." Panelists unanimously gave the probability of a recession

in 2017 as 25% or less, and 74% of panelists estimate a 25% or lower chance of a

recession in 2018 - with the remainder believing the probability of a recession

in 2018 is between 26 and 50%.

     Delving into these downside risks, when asked about the implications of

renegotiating NAFTA on the U.S. economy, business economists were divided.

Thirty-five percent believe that a renegotiation could yield at least marginal

net benefit, 27% expect it to have a negative net impact, and 30% anticipate no

net impact. In relation to a stock market decline, the survey found that the

"median estimate of the impact of a sustained 10% correction in stock prices, as

measured by the S&P 500 Index, on real GDP growth over the course of a year, is

a decline of 0.23 percentage points."

     When asked about fiscal policy reform, the majority of those surveyed

expect that action on tax reform and infrastructure spending will take place

before the end of 2018. However, the proportions of these majorities are smaller

than they were in June, showing signs of dwindling faith for fast reform.

Seventy-four percent of panelists expect individual tax cuts to be enacted

before the end of 2018, vs. June's 83%, and 74% of panelists expect corporate

tax reform to be enacted before the end of 2018, vs June's 79%. In regards to

infrastructure spending, 61% anticipate action before the end of 2018, a fall

from June's 83%. Panelists believe that the impact of potential federal fiscal

policy on real GDP growth is 0 in 2017 and +0.25% in 2018.

--MNI Washington Bureau; +1 202-371-2121; email: holly.stokes@marketnews.com

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