US: Economic conditions remain solid as optimism rises - NAB

Tony Kelly, Senior Economist at NAB, notes that the US surveys show business conditions are solid, while small business and consumer sentiment has strengthened post-election.

Key Quotes

“However, increases in interest rates and the US dollar may act as a constraint on growth until the expected fiscal stimulus kicks in later in the year. Partial data point to moderate, over 2% annualised GDP growth, in the December quarter.”

“We expect GDP growth will be modest for much of 2017 but then strengthen towards the end of the year and into 2018 as fiscal stimulus kicks in. As a result, we expect GDP growth will be higher in 2018 (2.3%) than 2017 (2.1%).”

“As expected, the Federal Reserve raised the target range for the fed funds rate by 25 basis points at its December 2016 meeting. The median Fed member projections looks for another three rate rises over 2017. Fed members, apart from tracking the most recent data, are clearly focussed on the possibility of a major fiscal stimulus. According to the December meeting minutes half of the members have already included an allowance for fiscal stimulus in their projections (but by how much and when is unclear).”

“We are currently projecting that there will be two further rate increases in 2017 and three in 2018. There is, however, the risk of a more aggressive tightening. With the unemployment rate already below the Fed’s longer term level, it is possible that the Fed will react quickly to any fiscal stimulus once it announced, depending on how concerned it is about getting behind the curve.”