North America The US: Fit for a marathon

North America The US Fit for a Marathon

The American economy is set to benefit in 2018 from one of its longest cycles of expansion amid a favorable policy-mix

US economy to be more balanced

The US economy registered a stronger than expected level of growth in Q3 17 at 3.2% (q/q annualized). This happened on the back of  higher contribution of net exports and investment, while consumption decelerated a bit after a remarkable period of stability.

This configuration is promising, as it taps into  more diversified sources of growth. Thus, we see  a more versatile allocation of  the benefits of what is now the second longest cycle of expansion.

A better balance of different contributors to growth will be the key theme for 2018.  We expect the US economy to accelerate and grow by 2.6% y/y against 2.3% y/y in 2017.

Household consumption will climb broadly at the same pace as in 2017 at 2.6% y/y amid steady progress on the job front and  higher wages. These would be counterbalanced by higher inflation and weaker growth in consumer credit. Investment will register the most significant improvement thanks to the boost provided by the Tax Cuts and Jobs Act (TCJA). 

Non residential investment will reach 5% on a y/y basis in 2018 compared with 4.4% y/y in 2017. Residential investment is also expected to accelerate albeit in a more muted manner as TCJA is not really judged as being supportive of the housing market.

TCJA to further tighten job market 

A late positioning in the cycle, limited redistribution effects (wealthy households are expected to benefit the most from individual tax cuts), a limited impact of tax repatriation initiative and the priority given to reducing taxes on corporate profits suggest a limited multiplier effect of the TCJA.

In our view, the most significant effect of the Act, beside the temporary boost to  growth (estimated at +0.5% in 2018), should appear in the job market.

This would take place  via higher wages expected at 3% y/y on average in 2018 against 2.5% y/y in 2017, as unemployment will decline to 3.5% ( from 4.1% today.) 

The Fed to hike 3 times in 2018

Despite a lower degree of slack in the economy, the Fed won’t be in a hurry to hike the Fed Funds Target rate. CPI inflation is estimated to rise by a mere 2.2% y/y in2018 compared to 2.1% y/y in 2017.  We expect three hikes in 2018 with the first move to take place in March.

Chart 1 US macro forecast (contribution to growth, %, YoY)