US Economic Conditions Remain Constructive, as Tax Changes Provide Boost for Corporate Sector

The constructive conditions for the US economy remain in place, in our view, in keeping with an increasingly solid expansion across the rest of the world. US consumers have been benefiting from an economy that appears close to full employment and a stock market at record levels, while a vibrant corporate sector has been buoyed further by recent tax changes. We would argue that this economic cycle has been markedly different from previous ones, both in terms of its extended length and overall sluggish pace of growth. Consequently, looking for historical comparisons—for example, in evaluating the potential for the tax package to stir hitherto subdued inflation—may be misleading. Though a modest cyclical rebound in inflation might occur, at this point it still seems hard to foresee pricing pressures building enough in coming months to prompt the US Federal Reserve (Fed) to turn significantly more hawkish.

Synchronized Global Expansion Continues, with Signs of Increased Demand for Commodities

Just as attempts to use historical precedents to predict the length and durability of the US economic cycle are undermined by the idiosyncratic nature of its recovery since the global financial crisis, much the same argument can be made about the wider global economy. The overall structure and pace of global growth—combined with the disinflationary forces affecting most of the largest economies—have been unparalleled, as indeed have the extraordinary measures taken by central banks over this period. The current synchronized global expansion may be halted by a geopolitical crisis or even a significant misjudgment of policy by central banks—both of which are inherently difficult to predict—but we think for now it would be a mistake to argue that global growth could struggle to endure because of cyclical considerations.

Eurozone’s Mix of Robust Growth and Weak Inflation Unlikely to Persuade ECB to Change Course

With the eurozone economy performing so well, speculation about the European Central Bank’s (ECB’s) path for monetary policy during 2018 is likely to be maintained and could intensify. While there may be some impact as market participants adjust to the ECB’s previously announced reduction in the amount of bonds it purchases each month, the central bank’s re-investment of maturing assets should have a dampening effect. But we think the temptation to assume that the strength of the economy could unduly influence ECB policymakers should be resisted. The central bank’s mandate is centered on inflation, for which there seems to be little indication of anything other than a gradual reduction of liquidity in the coming year, with the prospect of interest-rate rises still some years off.

US Economic Conditions Remain Constructive, as Tax Changes Provide Boost for Corporate Sector

The constructive conditions for the US economy remain in place, in our view, in keeping with an increasingly solid expansion across the rest of the world. US consumers have been benefiting from an economy that appears close to full employment and a stock market at record levels, while a vibrant corporate sector has been buoyed further by recent tax changes. We would argue that this economic cycle has been markedly different from previous ones, both in terms of its extended length and overall sluggish pace of growth. Consequently, looking for historical comparisons—for example, in evaluating the potential for the tax package to stir hitherto subdued inflation—may be misleading. Though a modest cyclical rebound in inflation might occur, at this point it still seems hard to foresee pricing pressures building enough in coming months to prompt the Fed to turn significantly more hawkish.

Data generally supported hopes that a moderately quicker pace of US growth had been maintained over the final quarter of 2017 and into 2018. As the new year began, estimates for annualized gross domestic product (GDP) growth in the fourth quarter included one of 2.7% from the Federal Reserve Bank of Atlanta and another of 4.0% from the Federal Reserve Bank of New York. US consumer spending strengthened in November, climbing 0.6% from the previous month, though October’s rise was revised down. There was speculation that the latest increase was at least partly financed by consumers’ savings, as the savings rate fell to its lowest level since the 2007–2009 global financial crisis. However, the backdrop for consumers remained largely positive, helped by the US stock market’s rise to new record levels by the end of 2017.