“Reasonably Bright”: The 2018 Economic Outlook

“Broadly speaking, the prospects for continued economic expansion in 2018 look reasonably bright,” said William Dudley, president of the Federal Reserve Bank of New York at a SIFMA event on the economic outlook for 2018.

In the keynote speech, Mr. Dudley expressed optimism regarding the prospects for continued economic expansion in 2018. “The economy is likely to continue to grow at an above-trend pace, which should lead to a tighter labor market and faster wage growth. Under such conditions, I would expect the inflation rate to drift higher toward the FOMC’s two percent long-run objective.” This supports the case for raising interest rates. Mr. Dudley predicted U.S. GDP will rise 2.5 percent to 2.75 percent in 2018 because of robust consumer spending, low unemployment and a soaring stock market. This represents an increase from his earlier prediction. President Dudley was more cautious about the economic outlook in the longer term.

The last estimate from the Bureau of Economic Analysis shows real GDP increased 3.2 percent in the third quarter of 2017, a result of increases in consumer spending, inventory investment, business investment and exports. SIFMA’s Economic Advisory Roundtable has forecast that the U.S. economy will grow 2.3 percent in 2017, strengthening to 2.5 percent in 2018. Members of the Roundtable, composed of 25 chief U.S. economists from SIFMA member firms, ranked U.S. fiscal policy and Federal Reserve actions as the factors with the most potential impact on U.S. economic growth.

Joining Ben White, Chief Economics Correspondent for Politico, three members of the Roundtable elaborated on upside and downside risks in the next year and beyond. “Recession risk is about three things: employment growth, employment growth and employment growth,” said Michael Gapen of Barclays.

The panel also focused on Fed Chair Janet Yellen’s upcoming departure and the transition to current Governor Jay Powell. “Jay Powell was the continuity candidate,” said Stuart Hoffman, Senior Economic Advisor for The PNC Financial Services Group. “[His selection as Chairman of the Fed] doesn’t change the outlook on Fed policy, including rate path or path of asset reduction.” Ethan Harris, Head of Global Economics Research for BofA Merrill Lynch Global Research, elaborated, “In [the Bank of America Merrill Lynch] Hawk-Dove chart Jerome Powell is closest to Janet Yellen. That was before we knew who would be Chairman.” (See Reuters and the Financial Times for more on Hawk-Dove charts).

From left: Stuart Hoffman of The PNC Financial Services Group, Ethan Harris of BofA Merrill Lynch Global Research and Michael Gapen of Barclays with Ben White of Politico

For more from these economists and the entire Roundtable, download SIFMA’s U.S. economic outlook and listen to the podcast.