Uncertainty about U.S. fiscal policy changes persists. Tax cuts and infrastructure spending proposals are on the table, but they are unlikely to be enacted in 2017. We continue to maintain skepticism about the timing and size of the fiscal policy boost to economic growth. In the meantime, the expansion continues on, unperturbed.
The upwardly revised real gross domestic product (GDP) growth of 1.2% in the first quarter reflects stronger final sales and a smaller drop in inventories compared with the advance report. A pick-up in the pace of business activity in the second quarter, followed by sustained momentum in the second-half of the year, is our baseline forecast.
Key Economic Indicators
Key Elements of the Forecast
- Following a tepid reading in the first three months of the year, consumer spending is predicted to move up in the second quarter. Auto sales slipped slightly in May, marking the fifth consecutive monthly decline. Solid labor market fundamentals, positive consumer sentiment and gains in wealth are supportive of further improvement in consumer spending.
- Sales of both existing and new homes fell in April, starts of new single-family were nearly flat and construction of apartment buildings has dropped for four straight months. Residential construction spending numbers for April were disappointing after six months of gains. On the positive side, home prices continue to advance, inventories of unsold homes are low, the homebuilder sentiment index posted a new cycle high, and mortgage purchase applications maintain an upward trend.
- Expenditures on structures and business equipment are both projected to advance in the second quarter. The Institute for Supply Management’s factory survey continues to point to growth. Shipments of core durables goods rose in April and bode positively for capital spending. The second quarter 2017 CEO Economic Outlook Survey recorded the best reading since 2005 for capital spending plans (the sum of respondents expecting higher or unchanged capital spending plans during the next six months stands at 95).
- Inflation has slowed somewhat in the last two months. The year-to-year change in the personal consumption expenditure price index, at 1.7% in April, is down nearly 45 basis points since February. The core inflation measure, which excludes food and energy, recorded a 1.5% increase for the year ending in April versus a 1.7% gain for the twelve months ending in February. Sustained economic activity in the quarters ahead should place upward pressure on the price level.