Needless to say, the surprise victory of Donald Trump in the U.S. presidential election has changed the economic outlook on many fronts. With detailed policy proposals still in the early stages of formulation, the precise impact remains a matter of speculation. Nonetheless, we can formulate broad conjecture about the probable course of the economy. Our comments of last week touched on these likely developments.

Expectations about fiscal policy have taken center stage. Some version of the president-elect’s expansionary fiscal policy program, consisting of tax reductions and large scale infrastructure spending, should earn Congressional support. The consequent increase in demand, given that the output gap (actual – potential GDP) currently is small, implies higher inflation. But the impact of the fiscal plan and other policy changes will be evident only much later in 2017.

In the meantime, post-election market reaction to these expectations is visible in higher equity prices, bond yields and inflation expectations. In response, we have made important updates to our inflation and interest rate forecasts. Other economic data remained in the background as elections took the limelight. Incoming reports remain favorable, on the whole.

Key Elements of the Forecast
  • Consumer spending in the fourth quarter is predicted to slightly exceed the third quarter’s performance. Auto sales during October recorded the highest mark since November 2015. October retail sales are expected to show gains across most major components. The personal savings rate has edged down in the last six months after holding around 6.0%.
  • The housing sector data show improvements. Single-family housing starts rose in September to 783,000 units and erased the losses seen in the previous six months. Permits extended for both single- and multi-family units increased in September, as did sales of new single-family homes which are close to post-crisis highs. Sales of existing single-family homes also increased in September. The Pending Home Sales Index, which leads actual home sales by one to two months, moved up in September and bodes well for sales in the months ahead.