Monthly Economic Outlook by Scott J. Brown, Ph.D.

Still in the sweet spot?

August 10, 2017

Summary:

  • Recent economic data have remained consistent with moderate economic growth in the near term.
  • Federal Reserve policymakers continue to expect that economic conditions will warrant a gradual pace of increases in short-term interest rates. The Fed expects to begin unwinding its balance sheet “relatively soon” (most likely October).
  • Fiscal stimulus, through increased infrastructure spending program or major tax reform, looks doubtful, but lawmakers may still lower tax rates in the months ahead.
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Gonna be a long summer

June 9, 2017

Summary:

  • Recent economic data suggest that, while second quarter GDP growth will be stronger than in the first quarter, the rebound is likely to be less than was hoped for earlier.
  • The underlying trend in nonfarm payrolls has continued to slow as the job market has tightened – a key focus of Federal Reserve policy and a limiting factor for economic growth.
  • The Fed is expected to raise short-term interest rates at the June 13-14 policy meeting, but the outlook for the next several quarters is more uncertain. Changes to the reinvestment policy may generate some confusion for the financial markets.
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Renewed hope, but will it be more of the same?

May 8, 2017

Summary:

  • Recent economic data have been consistent with moderate growth over the near term (following a soft 1Q17).
  • The Federal Reserve, focused on the job market and the inflation outlook, is gradually normalizing monetary policy and will likely end the reinvestment policy later this year.
  • The widely anticipated Trump tax “plan” was a one-page, detail-free repeat of what was proposed six months earlier – and will likely face an uphill battle in Congress. Nevertheless, stock market participants remain enthusiastic.
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Reassessing the trump trade

March 30, 2017

Summary:

  • Recent economic data have been mixed, consistent with moderate growth over the near term.
  • The failure of the House to pass legislation to repeal and replace the Affordable Care Act has cast some doubt about the ability to achieve the rest of the “Trump agenda.” However, while comprehensive tax reform appears to be unlikely, there’s a good chance that Congress will be able to lower tax rates.
  • The Fed followed up its December move with another rate increase in March. While tightening is more aggressive than in the last two years, there’s considerable uncertainty ahead.
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Cautious optimism

February 10, 2017

Summary:

  • Economic data have been subject to seasonal distortions, but recent figures have remained consistent with positive momentum in consumer spending and business investment.
  • Optimism about the economy has increased since the November election, but a tight labor market and difficulties in getting President Trump’s agenda through Congress are likely to be constraints. Global trade disruptions are the greatest risk.
  • Monetary policy remains data-dependent, but the Federal Reserve is expected to raise short-term interest rates gradually.
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The 2017 economic outlook

December 19, 2016

Summary:

  • The U.S. economy is closing out 2016 on a firm footing. The household sector is in good shape. Post-election optimism may contribute to a pickup in business fixed investment. The global outlook is a bit brighter, although challenges remain.
  • Republicans control the White House and Congress, which should make it easier to get things done. However, there are likely to be some conflicts between the incoming administration and establishment Republicans in Congress. Power transitions are typically bumpy, with many unforeseen events.
  • Monetary policy will remain data-dependent, but the Federal Reserve is still expected to raise short-term interest rates gradually. Expectations of a larger federal budget deficit have lifted long-term interest rates, but low rates abroad should prevent U.S. bond yields from rising too rapidly.
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The post-election outlook

November 21, 2016

Summary:

  • The unexpected result of the presidential election has generated optimism that reduced regulations, added infrastructure spending, and lower taxes will spur growth.
  • However, the economy appears to be relatively close to full employment. If so, fiscal stimulus would be more likely to add to inflation or fuel asset bubbles. Expectations of increased government borrowing have lifted long-term interest rates.
  • It’s unclear what policies we’ll get out of Washington in 2017. A trade war remains a significant risk.
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The new normal

October 12, 2016

Summary:

  • The near-term economic outlook is “more of the same” – mixed but moderate growth, with moderate inflation.
  • While the presidential race appears to be less uncertain, attention has turned to down ballot contests, which could alter the composition of the House and Senate.
  • The underlying trend of economic growth in the U.S. and around the world is slowing, creating a number of challenges for policymakers and investors.
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In a Fed spin

September 8, 2016

Summary:

  • Economic data have been mixed, but generally consistent with moderate economic growth in the near term.
  • Federal Reserve officials, including Chair Yellen, have signaled a possible September 21 rate hike. However, while short-term hawkish, officials also appear long-term dovish.
  • Financial market participants doubt the central bank’s resolve. However, a 25-basis-point increase in the federal funds target rate should not have a major impact
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Brexit Wounds

July 14, 2016

Summary:

  • Brexit will be bad for the U.K. economy, but should have a very limited impact on U.S. growth.
  • Recent data reports have been consistent with mixed, but moderate growth in the U.S. Payroll numbers have been choppy, reflecting noise in the data, but the trend has slowed, signaling both business caution and a tighter job market.
  • The Fed remains in tightening mode, expecting to resume policy normalization at some point. However, officials should not be in any hurry to raise rates
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Jobs and growth: Diminished expectations

June 6, 2016

Summary:

  • Nonfarm payrolls rose more slowly in the three months ending in May, which may reflect noisy data. However, job gains will slow as the labor market tightens, and future labor force growth will be a lot slower than in previous decades.
  • U.S. economic growth is likely to be moderately strong in the near term, led by consumer spending, but restrained by continued subpar global growth and cautious business investment.
  • The Fed’s policy outlook is geared on tighter labor market conditions and a desire to normalize policy over time. However, asymmetric risks, global concerns, and business caution should keep short-term interest rates on a gradual path.
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Back in the Sweet Spot?

April 21, 2016

Summary:

  • Recent economic data reports have been generally soft, suggesting relatively weak GDP growth in the first quarter. However, the data are also consistent with moderate growth in the near term – not strong, but not terribly weak either.
  • Following signs of a pickup in core inflation in January and February, March inflation figures were more benign. Combined with the moderate growth outlook, the Fed’s gradual path of policy normalization should be even more gradual.
  • Much of the fear that was rampant at the start of the year (China, Fed tightening, a too-strong dollar, a possibility of “recession”) has subsided. As in the last few years, the economic expansion is expected to continue, but not so fast that the Fed rushes to take away the punch bowl.
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Cognitive Dissonance

March 7, 2016

Summary:

  • The consumer outlook remains positive, driven by job gains, wage growth, and a further decline in gasoline prices. Consumers are concerned about the overall economy, but generally feel better about their own financial situation.
  • Businesses remain mostly cautious amid concerns about global growth, fear of “recession,” and election-year uncertainty. Foreign trade and an inventory correction are likely to be moderate drags on GDP growth in the near term.
  • The Fed remains in tightening mode, but recent financial market developments should keep monetary policy on hold in the near term. A June hike is likely to be on the table, but the decision to move will remain data-dependent.
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Front-Loading Anxiety and Risk in 2016

January 13, 2016

Summary:

  • China’s stock market troubles have fanned concerns about the strength of the country’s economy and the ability of Chinese authorities to stabilize the situation. However, the bigger concern is the yuan, which is under considerable pressure
  • The U.S. economic data have been mixed, with signs of somewhat slower GDP growth, but continued strength in jobs.
  • The Fed is still expected to raise short-term interest rates further, but global disruptions are likely to lead officials to delay the second rate hike beyond March.
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The 2016 economic outlook (Briefly)

December 17, 2015

Summary:

  • The theme of domestic strength and global weakness is expected to remain prevalent into the first half of the year. Job growth is expected to remain strong, but likely slower than in the last two years. The benefit to consumer spending from lower gasoline prices should fade as energy prices stabilize.
  • The global outlook will be important. The advanced economies are expected to grow moderately, while emerging economies should be mixed. The Chinese currency is likely to depreciate a lot more, but gradually over the course of 2016.
  • The Fed is expected to raise rates gradually (25 basis points at every other policy meeting), but policy action will be data- dependent and the risks are that it will be less aggressive.
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Fed Set to Begin Normalization

November 19, 2015

Summary:

  • U.S. economic activity has appeared mixed, but generally moderate into 4Q15, with a strong (but somewhat slower) trend in job growth and low inflation.
  • Downside risks (to the U.S. economy) from the rest of the world appear less worrisome than a couple of months ago.
  • Federal Reserve officials have signaled a strong likelihood that short-term interest rates will be raised in December. More importantly, while further policy tightening will be datadependent, the pace of rate increases is expected to be gradual.
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Mixed

October 7, 2015

Summary:

  • The slowdown in global growth and the stronger dollar have restrained U.S. exports. A wider trade deficit and an inventory correction are expected to subtract from GDP growth.
  • In contrast, consumer spending growth appears to have remained brisk, factory shipments of capital goods have improved, and the housing sector continues to recover.
  • Since postponing the initial increase in short-term rates in mid-September, most Fed officials (including Chair Yellen) have indicated that a rate hike is likely to be warranted by the end of the year. The markets believe the Fed will wait until 2016.
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Fed Delays / Government Shutdown Looms

September 22, 2015

Summary:

  • Global financial and economic developments are expected to have a mixed, but uncertain, impact on the U.S. economy. The Federal Reserve is still set to raise short-term interest rate. Officials appear to be mixed, but are generally cautious.
  • Slower global growth and an inventory correction may restrain GDP growth, but domestic demand should benefit from lower commodity prices and is expected to remain strong.
  • Showdowns over the FY16 budget and the debt ceiling may lead to a government shutdown. While a shutdown would likely have a limited impact on the economy, it could add to financial market anxieties in the weeks ahead.
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Broken China

August 25, 2015

Summary:

  • Fears of slower growth in China and other emerging economies have added to investor anxieties around the world.
  • While U.S. exporters will face restraints from slower growth abroad, lower commodity prices should be beneficial for consumers and domestic-oriented businesses.
  • The Fed remains on track to begin raising short-term interest rates, but downward pressure on commodity prices and the lack of a meaningful pickup in wage growth is likely to lead the Fed to delay policy action the near term.
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Second-, Third-, and Fourth-Guessing the Fed

July 23, 2015

Summary:

  • An agreement between Greece and the European Commission has reduced the odds of a near-term exit from the monetary union. However, the country's situation is unresolved and we are likely to see tensions heat up again at some point.
  • Federal Reserve officials continue to signal that economic conditions are likely to warrant an initial increase in short-term interest rate this year, but they have also emphasized that the more important question is the pace of tightening beyond the first move - and that pace is expected to be gradual.
  • While Greece is mostly off the table as a near-term risk, U.S. investors are likely to remain concerned about a variety of other issues, including the timing of Fed rate hikes and a possible longer-term slowdown in China.
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Fed on track for policy normalization

June 23, 2015

Summary:

  • Economic data have been consistent with moderate growth in 2Q15, but with mixed strength across sectors.
  • Excess slack in the labor market continues to be reduced, but full employment still appears to be many months away.
  • Monetary policy will remain data-dependent. It’s likely the Fed will begin raising short-term interest rates later this year, but the pace of tightening is likely to be very gradual.
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Yikes! (but mediocre news may be “good” news)

May 13, 2015

Summary:

  • GDP growth was weak in 1Q15. More importantly, the anticipated 2Q rebound appears likely to disappoint.
  • The economic backdrop may be favorable for equities. The economy continues to recover but not so rapidly that the Fed will rush to take away the punch bowl.
  • However, earnings growth remains an issue for the stock market and a sharp increase in bond yields in Europe has contributed to a similar rise in yields of long-term Treasuries.
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Still optimistic, but some uncertainties

April 24, 2015

Summary:

  • Growth slowed in the first quarter, reflecting bad weather, West Coast port issues, a contraction in energy exploration, and the impact of a strong dollar, but is widely expected to pick up.
  • Senior Fed officials continue to suggest that conditions are likely to warrant an initial increase in short-term interest rates this year. However, they also believe that the more important question is the pace of tightening after the first hike, and they suggest that that pace is likely to be very gradual.
  • Financial market participants face uncertainty regarding the pace of economic growth here and abroad, as well as Fed policy changes, geopolitical worries, and other issues.
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The fed, U.S. dollar, and markets

March 10, 2015

Summary:

  • The Federal Open Market Committee is widely expected to alter its language in the March 18 policy statement, abandoning the view that it can "be patient" in deciding when to begin raising short-term interest rates. However, that does not mean that the Fed will raise rates anytime soon.
  • The Fed will have to raise rates eventually. In contrast, other central banks are battling the possibility of deflation. Monetary policy is the major factor in short-term movements in exchange rates. The dollar is likely to strengthen further in the near term.
  • The strong dollar is a plus for consumers, but a negative for exporters. There are two opposing forces at work on bonds: worries about the rest of the world, which are keeping yields down, and increasing domestic economic strength, which would normally be pushing bond yields higher.
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USA! USA! USA!

January 22, 2015

Summary:

  • U.S. economic growth should pick up in 2015, as lower gasoline prices are expected to provide significant support for consumer spending. Importantly, the expansion is now characterized by an improving outlook for small and mediumsized businesses, which should continue to propel economic growth even after gasoline prices stop falling.
  • The outlook for other advanced economies has softened further and emerging economies are likely to be a bit spotty in 2015. The U.S. dollar should continue to strengthen and a flight to quality is expected to keep long-term interest rates low.
  • The Federal Reserve is expected to begin normalizing monetary policy in the second half of the year. However, shifting views on the Fed’s timing outlook, economic developments outside the U.S., and geopolitical tensions are likely to keep financial market volatility at elevated levels.
View the entire report (PDF)