Despite a great deal of news volatility, the U.S. economic landscape is satisfactorily stable. Growth continues, and inflation is not overly threatening. We continue to await further clarity on fiscal policy, which may be some time in coming. As such, our growth forecast does not reflect much of a “Trump Bump.” Real gross domestic product (GDP) grew at an annual rate of 1.9% in the fourth quarter, versus a 3.5% increase in the prior quarter. A large reduction in exports was one reason for slower GDP growth. Growth should be a little better than this going forward, but not by much.

Key Economic Indicators

Key Elements of the Forecast

  • Consumer spending slowed in the fourth quarter to an annual rate of 2.5%, despite the large increase in auto sales (18.1 million units in fourth quarter vs. 17.5 in the third). Outlays on both goods and services advanced, but the latter showed a more marked deceleration than the former. Auto sales dipped in January, which likely will trim the pace of overall consumer spending in the first quarter.

  • The much-awaited pickup in capital spending may have started in the fourth quarter. Business equipment expenditures, which have been weak since the end of 2015, rose 3.1%. The Institute for Supply Management’s composite index climbed to 56 in January, the highest since November 2014. Other business sentiment surveys remain positive and support expectations of an increase in business spending.

  • The housing market faces mixed currents. Favorable employment and income trends point to further housing-sector growth, but rising mortgage rates will be a drag. Residential investment expenditures grew 10.2% in the fourth quarter after two quarterly declines. Sales of new homes fell in December, but advanced at a strong clip (+11.8%) overall in 2016. Although purchases of existing homes slipped in December, the year ended as the best in a decade.

    Data indicate that in 2016, home prices hit all-time peaks in 44% of the 201 metro areas with populations of at least 200,000. According to the National Association of Realtors, the marketplace had only a 3.6-month supply of unsold existing homes during December 2016, which is the lowest level since it began tracking the supply of homes in 1999.