U.S. Macro Outlook Q1 2018

by James Lane | May 23, 2018

U.S. Macro Outlook Q1 2018

U.S. Gross Domestic Product (GDP) grew at an annualized rate of 2.3% in Q1 2018—slower than the 2.9% registered in Q4, but above the 2.1% consensus estimate. The better-than-expected performance came despite markets being rattled by volatile stock markets and the announcement of potential tariffs on certain imports.

Our baseline forecasts remain largely unchanged from last quarter. We expect the government’s fiscal stimulus to boost growth, though gains are modest given that the economy is operating at near-capacity. Inflation in 2018 is stronger than 2017’s 2.1%. The 10-year Treasury hovers around 3% for the rest of the year, with the possibility of rising higher, due in part to the Fed’s balance sheet reduction and the increasing government debt issuance. We expect a relatively mild slowdown to begin in late 2019—5 quarters with GDP growth between slightly negative and 0.8%. The slowing causes the Fed to lower interest rates, and the 10-year drops from 3.0% in 2018 to 2.2% in 2019. Inflation also declines with the slowing economy. We see a quick rebound only toward the beginning of 2021 as the economy recovers.

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