US economic outlook: there remains significant uncertainty – Nomura


Analysts at Nomura explained that they expect continued growth with balanced risks. 

Key Quotes:

Activity: In the wake of the election, we expect the Republican-led Congress and the Trump administration to support fiscal stimulus. That stimulus is likely to include modest tax cuts that will likely be passed sometime in late in the year. We also expect slightly higher federal spending on defense and infrastructure. Two sets of less conventional policies – possible restrictions on trade and immigration – have the potential to limit growth. We expect the Trump administration to impose or increase targeted import tariffs on certain US imports. Such trade barriers could incite retaliatory actions by other countries (hurting exporters). We also expect the Trump administration to put in place policies that will restrict the inflow of new immigrants and increase the outflow of existing immigrants. This could have a notable effect on labor force growth, which, in turn, would limit economic growth. At this point, uncertainty clouds the outlook for policy, but our preliminary assessment suggests that proposed tax cuts and federal spending should boost growth in late 2017 and into 2018 before the negative effects of restrictive trade and immigration policy start to take over and reduce growth in 2018 and beyond. 

Inflation: We expect core CPI inflation to remain slightly above 2%, while core PCE inflation should trend gradually higher as inflation of core goods and healthcare services picks up while rent inflation slows. With oil prices generally trending higher since Q1 2016, we expect headline inflation to rise modestly this year, on average. With steadily increasing pressure induced by fiscal policy, we believe core inflation will grow slightly faster in 2018 than we previously expected. 

Policy: After years of the Federal Reserve being “the only game in town,” fiscal support is coming. The Fed will likely be more aggressive in response to major fiscal stimulus as the economy is closer to full employment than we had expected before the election. We forecast the Fed to conduct two additional hikes in 2017 and two in 2018. 

Risks: There remains significant uncertainty surrounding our forecast as there is little concrete information on which fiscal policies will be enacted. It could take many months for that uncertainty to clear. Also, geopolitical uncertainty, slower global growth, the strong dollar, and tight financial conditions remain key risks to our outlook.”

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