The economic setting within the United States as the new year commences is largely constructive. Data received in the latter weeks of 2016 were encouraging, and there seems to be an improving economic sentiment.

This improved sentiment anticipates reductions in personal and corporate tax rates, as well as a substantial program of infrastructure spending. But it is unlikely, in our view, that the scale of these efforts will match what was promised on the campaign trail. Further, the effective dates of these actions are unknown and will most likely occur in late 2017 or early 2018. And monetary policy may be forced to respond to the risk of higher inflation, which could result from the economy running hotter while near full employment.



For now, we have made little allowance in our forecast for the impact of fiscal expansion. We’ll be monitoring the details of the new administration’s economic policies and their progress through Congress. When the contours become clearer, we’ll update our expectations accordingly.

For now, third quarter real gross domestic product (GDP) was revised up, and recent U.S. economic reports point to continued forward momentum.

Key Economic Indicators



Key Elements of the Forecast

    • Consumer spending is predicted to remain strong in the final three months of 2016, supported by a robust pace of car sales (18.1 million units vs 17.5 million in 2016:Q3). Personal income and employment conditions are also favorable and underpin growth in consumer spending during the quarters ahead.
    • Residential investment expenditures fell in the second and third quarters of last year. The data we have for 2016 show that home sales have increased, but at a slightly slower pace than the level of activity recorded for 2015. Construction of new homes advanced in 2016, but posted roughly half the gain seen in 2015. Undoubtedly, the 80 basis points increase in mortgage rates since September will be a negative for home sales. But positives such as employment and income are significant factors that support housing demand. On net, a modest increase in housing sector activity cannot be ruled out.