BALTIMORE – February 5, 2018 – U.S. GDP will grow by 2.6% in 2018, up from 2.3% in 2017 and above the 2.2% average growth rate since the economy entered its recovery period, according to the world’s largest trade credit insurance firm Euler Hermes. While variables like political uncertainty cloud the outlook, positive factors such as increased consumer confidence, growth in manufacturing and wages, and pro-business policies all point to an above average year for the U.S. economy.
2018 Has Momentum
The US economy has many reasons to be confident at the start of 2018.
Soaring consumer confidence has finally been realized in spending. Retail sales in October and November of 2017 were on fire, with the year-over-year growth rate rising to 6%, the fastest in almost six years.
- Overall personal consumption has been slower to accelerate, but the likely culprit – dragging income growth – may be in for a boost. Productivity is on the rise for the sixth straight quarter, and there is now a job opening available for every unemployed person for the first time in recent history, which will pressure wages up.
- Manufacturing has been on the rise. The Institute of Supply Management’s Manufacturing index shows the industry as growing well above the level indicating expansion, and new orders for core durable goods have accelerated to a blistering pace of 7.9% year over year. Both of these measures indicate a steady supply of activity in the sector.
- The Trump administration’s pro-growth agenda has led to increased business confidence and resulted in gains in equities and wealth. Gains in the market have remained steady despite difficulties implementing the agenda. The passing of tax reform will bring new highs in an optimism-driven market, and the corporate tax cut will allow corporations to invest in equipment and labor.
“Predicting that the economy will do well tomorrow just because it is doing well today can be a tenuous proposition,” said Dan North, chief economist at Euler Hermes North America. “But when the majority of important measures of an economy are all doing well at the same time, it does point to an underlying strength that can’t be ignored.”
Speed Bumps Still Exist
Despite many reasons for increased optimism, there are still potential problems facing the U.S. economy in 2018, including imbalances that will make it difficult to return to the skyrocketing growth rates of 4%-8% experienced during the 80s and 90s.
- The treasury yield curve is rapidly going the wrong way, hinting at slower growth in the future. The yield spread skyrocketed on hopes for a pro-growth agenda, but as the momentum in Washington slowed, the impatient bond market began to narrow the spread. It is important to note narrowing spreads are not just due to the short-term disappointment over Congress’ gridlock, but also due to the Fed tightening interest rates – we expect at least three rate hikes this year.
- The 2018 midterm elections hold the potential to derail the current agenda. The administration’s policy on trade is also distinctively anti-growth. Leaving NAFTA could cause significant damage to the U.S. economy, as trade with those countries supports about 10 percent of all American jobs.
- It is possible for growth to happen too fast. When businesses grow too rapidly, every month they ship more and more goods that cost more and more money to produce, and then they fail to collect on accounts receivable fast enough. Cash flow goes negative, and eventually, the business goes bankrupt.
- With growth comes a need for labor, and the nation faces structural unemployment issues created by an aging population and a lack of skilled workers.
“It is likely that 2018 will not be the year the U.S. sees a return to the historic growth levels, but a careful hand on the steering wheel, consumer confidence and wage growth, a full manufacturing pipeline, and a rising stock market should keep the economy steady on its uphill drive,” said North.
EULER HERMES GROUP