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Several weeks into the new administration, a new sense of optimism about future economic growth pushed the equity market into a new high. The Fed has hinted strongly on plans to hike the interest rate as often as necessary in 2017 to thwart overheating of the economy. The question is whether to expect inflation or reflation in light of the glut in the energy market as well as the considerable time that it will take for infrastructure spending to translate in higher employment and income. The market remains uncertain as to how to process risks and rewards associated with the much-anticipated trade restrictions on real output, employment, and inflation. It is much easier to remove or reduce regulations on producers or implement tax cuts, while identifying and funding shovel-ready infrastructure projects with a significant impact on demand for workers and material is substantially time consuming. The proposed immigration policies will adversely affect many sectors of the economy, including construction, food services, agriculture, and retail. The impact on the construction and agriculture industries will be more immediate. Inflation in home prices will be quickly noticeable in many municipalities where excess demand conditions prevail. In anticipation of rate hikes by the Fed, the 30-year fixed mortgage rate has hit a high for this year, adding to cost of home ownership.
Consensus puts growth in the GDP at 1.71 percent by the first quarter of 2018, which is only slightly higher than the 1.59 percent reported in the last issue of this journal and far short of the administration's aim of 3 or even 4 percent. Georgia State University economist, Rajeev Dhawan, is slightly more optimistic with 2.2, 2.3, and 2.5 percent growth in the GDP in 2017, 2018, and 2019, respectively. John Silva, Wells Fargo's chief economist, predicts above-consensus GDP growth for 2017 and 2018.
CONSUMERS
Consensus puts growth in Personal Consumption Expenditure (PCE) at 3.58 percent. Meanwhile, Personal Disposable Income is expected to grow at a slightly higher rate of 3.82 percent. This is the first in a good time when the income of households is expected to grow faster than their consumption. This outcome is expected, given that after a prolonged recession, it takes time for growth in income to catch up with pent-up demand...