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Economic Forecasts

Trump’s Impact on Economy Will Take Time

Kiplinger's latest forecast for the GDP growth rate

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GDP 2.1% growth in ’17, following 1.6% in ’16 More »
Jobs Hiring pace should slow to 160K/month in '17 More »
Interest rates 10-year T-notes at 3% by end '17 More »
Inflation 2.4% in '17, up from 2.1% in '16 More »
Business spending Rising 3%-4% in ’17, after flat ’16 More »
Energy Crude oil trading from $55 to $60 per barrel in May More »
Housing Single-family starts up 9% in '16, 11% in '17 More »
Retail sales Growing 3.9% in '17 (excluding gas) More »
Trade deficit Widening 4% in '17, after nearly flat '16 More »

Look for GDP growth of 2.1% in 2017, well below the 4% average target that President Trump wants to hit. It will take time for his policies to make a difference.

His proposed tax cuts could have the quickest influence on the economy if adopted right away. But they probably won’t be in place until late this year or early in 2018. Plus, as demonstrated by the 2001 and 2003 tax cuts by President George W. Bush, consumers tend to use initial tax savings to pay down debt. Increased individual spending, which boosts GDP growth, tends to come later.

See Also: All Our Economic Outlooks

Trump’s proposal for extra infrastructure spending probably won’t be approved by Congress until fiscal year 2018, which starts this October. Even then, it will take months for the money to be spent. Getting the necessary permits can delay infrastructure projects even longer.

Meanwhile, the rise in interest rates and the value of the dollar since the election will act as a drag on growth. Strong consumer spending, driven by wage and employment gains plus the buoyant stock market, is likely to be the main pillar supporting the economy this year.

We do expect GDP growth in 2018 and 2019 to be spurred by the fiscal stimulus of tax cuts and infrastructure spending. Instead of the 2.2% growth we previously forecasted for those years, we now look for the economy to expand by 2.5% to 3%, depending on how much of Trump’s program is approved and whether Congress enacts spending cuts to reduce the deficit.

GDP grew by 1.9% in the fourth quarter of 2016. Exports fell and imports rose, causing a drag of 1.7 percentage points on the growth rate. Better news came from business spending on inventories — up a full percentage point. That’s a sign of improving business confidence. Most of the rest of GDP growth came from consumer spending, which rose 2.5%. That was lower than in the previous two quarters, but still a decent number. Construction of new housing also showed strength. But business spending was modest, with an increase in equipment purchases nearly matched by a decline in new construction of industrial buildings and power plants.

Another modest piece of good news was that spending on mining equipment and structures rose for the first time in two years. Federal government spending declined because of a big drop in defense spending, but state and local government construction jumped, so total government spending rose.

See Also: The Trump Effect on Financial Markets

Source: Department of Commerce: GDP Data