Monday Morning Outlook - 2017: Dow 23,750, S&P 2700
We have used the metaphor of the "Plow Horse" to define the US economy since 2009 – an economy driven by new technology and entrepreneurship (fracking, the cloud, smartphones, big data...), but held back by the friction of a growing and burdensome government.
Since mid-2009, real (inflation-adjusted) economic growth averaged a Plow Horse-like 2.1% per year. With the current forecast for Q4 real GDP at 2.5%, 2016 will finish right on that average.
The great news is that we finally have more than just hope to believe that this year, 2017, is the year the Plow Horse Economy finally gets a spring in its step.
We're looking for real growth of about 2.6%, led by faster growth in home building, a return to more normal growth in inventories, and, most importantly, more business investment.
That last part is key. Other than investment in technology, which has helped boost productivity, business investment has been weaker than normal. It looks very likely that President-Elect Trump and Congress are going to push for supply-side cuts in the corporate tax rate. In addition, cuts in regulation and less emphasis on government subsidies which direct resources toward politically-favored, and non-efficient industries will reduce economic friction. As a result, look for firms to both raise investment and use their pre-existing assets more efficiently.
In spite of these gains in efficiency, there is a massive amount of excess monetary liquidity in the system and inflation looks likely to pick up. In 2015, the consumer price index was up only 0.7%, held down by another year of falling energy prices. For 2016, it looks like the CPI will be up 2%. For 2017, look for an increase in the CPI in the 2.5% to 3.0% range.
Meanwhile, the unemployment rate will keep falling. Next year should end with the jobless rate at 4.4% (versus 4.6% in November), with risks more toward a lower rate than a higher one. Healthy job growth will continue, but companies will get more output growth from productivity.