OUTLOOK '18 US economy continuing momentum into new year

28 December 2017 16:30 Source:ICIS News

HOUSTON (ICIS)--Thanks to strong domestic growth, low unemployment and finalised tax reform, forecasts for the US economy in 2018 are optimistic, with many expecting the gains from 2017 to continue.

President Donald Trump signed the tax reform bill near the end of December, which, among other substantial changes to the code, will reduce the nation's corporate tax rate from 35% to 21%.

Though Moody's Investors Service said the cuts will contribute only modestly to economic growth – likely by 0.10-0.20% of gross domestic product (GDP), various trade groups said the changes will encourage further growth and development.

In its year-end 2017-2018 outlook, the American Chemistry Council (ACC) expects US GDP growth to be at 2.3% in 2017, with acceleration to a 2.5% pace in 2018.

The continued recovery in the oil and gas sector, as well as improvement in related investments, is a leading factor behind the stronger economic growth figures, the ACC said.

Though economic firm Vanguard Group cited in its 2018 outlook that the projected odds for a US market correction are higher now than they have been since the 2009 recession, geopolitical strategist Peter Zeihan doubts a recession, or correction, will hit in 2018.

“I’m much more concerned about a banking crisis in China or Europe than I am about any sort of correction in the US,” he said. “We now have the second-longest recovery on record. A correction is inevitable at some point, but all of the normal inflationary and labour pressures that would push us in that direction still seem pretty subdued.”

Panelists surveyed by the National Association for Business Economics (NABE) also believe that a recession is unlikely in 2018. Of the 51 economists surveyed in December, only 7% of respondents believe the current business cycle will peak end of 2018.

Continued gains across several industrial sectors supported economic growth this year, the ACC said.

Regarding the automobile industry, production, as well as sales for light vehicles in the US slipped in 2017 despite a brief bump due to hurricane-related losses, and the ACC expects the trend to continue. Sales are forecast to end at 17.1m in 2017, and to be down to 17.0m in 2018.

The outlook for housing is up in 2018, especially in regards to rebuilding efforts following the several natural disasters that struck along the US Gulf Coast. All three components to the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI) posted gains in December, including current sales conditions, buyer traffic and possibly most telling, sales expectations.

The NAHB said the market is primed to expand in 2018, with US home builder confidence rising five points in December from November to 74 on the HMI, marking its highest level since July 1999.

US manufacturing should continue expanding in 2018, with revenue rising by 5.1% and capital expenditures rising by 2.7%, the Institute for Supply Management (ISM) said in its semi-annual economic forecast.

Manufacturing employment is expected to grow by 1.2%, the ISM said, while the US Federal Reserve recently noted that it expects labour market conditions to remain strong, with the unemployment rate hanging around 4%.

Fed chair Janet Yellen said in her final news conference that many US workers are still working only part-time, but would prefer full-time work.

Though global management consulting firm McKinsey & Company estimates between 400m and 800m labourers worldwide could be replaced by automation between 2018 and 2030, Zeihan said the US could have more time to deal with the issue than other countries.

“The US has the advantage of having high-skilled, mid-skilled and low-skilled labour all in the same market,” he said. “That makes it a lot harder for automation to kind of dig in, because there’s always someone on the labour scale that can take the position.”

The Fed noted in its November summary of economic conditions that disruptions from the 2017 Atlantic Hurricane season negatively affected the economy in the short-term, but added that economic activity has been rising at a solid rate despite those disruptions.

The Fed voted to raise interest rates to 1.25-1.50% in December. The chance it will raise rates to 2% by the end of 2018 seems increasingly likely, the Vanguard Group said.

By David Haydon