The latest economic expansion, which began June 2009, celebrated its eighth birthday this month. It also hit another milestone in recent months, when it became the third longest expansion since World War II, exceeding the length of the 92-month expansion that started in November 1982. So, what does this mean for the expansion moving forward?
As we have indicated in the past, we don’t believe that expansions die of old age. Rather, they die of excesses. As noted in our Midyear Outlook 2017: A Shift in Market Control publication, the economy has experienced a slow and steady trajectory throughout the expansion, and this slower pace may actually lessen the potential for economic excesses; a theory that is corroborated by readings for levels of spending, confidence, and borrowing as measured by the LPL Research Over Index.
Despite a weak first quarter where gross domestic product (GDP) growth came in at a disappointing 1.2%, we continue to look for the U.S. economy to expand near 2.5% in 2017 with potential for further acceleration in 2018. Although potential delays in passing major fiscal policies introduce some risk to the downside, our optimism stems from:
- Recent data on consumption, employment, housing, manufacturing, and services all pointing toward potential improvement in the months and quarters ahead.
- Continued job growth and moderate wage gains that may allow for consumption growth without the need for an accommodative central bank.
- Anticipated fiscal legislation that may provide further incentives for businesses to take economic risks, such as investing in property, plant, and equipment, to position for future growth.
Potential risks to our outlook include:
- “Soft data,” such as consumer and business confidence measures, need to translate into stronger “hard data” (actual measures of economic activity).
- Continued strength in business spending will be needed to drive productivity growth, which is key to sustainable long-term economic growth.
Fiscal policy could also enable government spending to help drive GDP, while the Federal Reserve’s tightening of monetary policy may limit upward pressure on the U.S. dollar, mitigating the potential for currency gains to interfere with export growth (a stronger U.S. dollar makes domestic goods more expensive for foreign buyers). Also, global GDP growth has been trending positive in 2017, and further improvements could benefit the U.S. economy by boosting exports.
Fiscal and monetary policy, coupled with recent economic trends, suggest our beginning-of-year forecast for near 2.5% GDP growth in 2017 remains reasonable.