Understand Your Finances
JPMorgan Chase's head economist's 2017 outlook
Last year saw many surprise headlines, from January's US stock market stumble to June's Brexit vote and the rise of anti-globalization politics in America that reverberated in November, with the election of Donald Trump as president.
Despite all this , the economy maintained forward momentum, bringing above-trend job creation, record low layoffs and steadily improving household balance sheets.
As the economy continues to strengthen, here are six key trends that will likely shape its development in 2017:
1. More fiscal growth
Donald Trump's administration, backed by a Republican majority in both houses of Congress, has unveiled a strongly pro-business, pro-growth agenda. While some initiatives, such as cutting regulations and boosting infrastructure spending, may take several years to impact the economy, the promise of tax reform has already spurred a stock market surge.
Tax cuts for businesses and households stand a strong chance of becoming law in early 2017, as procedural rules make them far easier for Congress to pass than traditional legislation. The GOP has largely coalesced around House Speaker Paul Ryan's "Better Way" plan, a comprehensive package of reforms designed to encourage investment and promote growth.
The stock market responded to the presidential election by climbing seven percent in the fourth quarter of 2016, creating almost $2 trillion in new wealth. This winter's anticipatory equities surge could be followed by a boost in GDP as the implications of tax reform become clear. Nonpartisan tax economists estimate that the planned stimulus could raise GDP by as much as 1 to 1.5 percentage points.
2. GDP growth may quicken
After years of relatively sluggish, the US economy is forecast to grow 2.3 percent over the course of 2017. While this may be slow compared to previous decades, it represents robust growth in an era of demographic decline.
Due to the retirement of the baby boom generation, the growth of the American workforce has slowed by a full percentage point compared to previous business cycles. The outsized wave of retirees currently leaving the job market may explain why GDP growth has been underwhelming, even in a time of rapid hiring.
This year could bring a surge in labor productivity as the business cycle nears its peak and capital investments in technology begin to pay off. Stable wage growth and low inflation are likely signs that the economy still has room to grow, so a period of strong expansion remains a possibility.
3. Labor market may tighten
The labor market has been adding jobs at an above-trend pace for several years, and the nation's supply of idle workers is nearly exhausted, as measured by the unemployment rate. While the job market still has room to expand, wage growth finally began to accelerate in the fourth quarter, a sign that full employment may be on the horizon.
As the ranks of available workers begin to dwindle, hiring activity will likely slow back into alignment with the underlying rate of population growth. The economy appears on a trajectory to reach full employment soon, quite possibly this year. When the labor market does begin to tighten, job creation will likely slow from today's above-trend pace. Combined with the emergence of inflationary pressure, full employment could set the stage for the Federal Reserve to normalize interest rates.
4. Interest rates will remain low
In December 2015, and again in December 2016, the Federal Reserve hiked interest rates by a quarter point, lifting rates from near-zero. These widely anticipated moves caused very little volatility in markets—interest rates are expected to remain at historically low levels for the foreseeable future, even as the economy makes a full recovery.
As always, the Federal Reserve will likely be guided by inflation. All signs indicate modest inflationary pressure in the coming year, and most analysts believe that a gradual process of interest rate normalization should be enough to contain rising prices.
5. The Dollar will stay strong
With the US economy poised to return to full strength, interest rate normalization underway and other key central banks following up with their own versions of asset-purchase programs, the dollar has been gaining against major foreign currencies.
By itself, this has hurt American manufacturers by making their goods more expensive in foreign markets, though consumers have benefited from cheap imports. However, the international policy actions that are contributing to the strong dollar will likely eventually benefit American businesses as they work to strengthen the Japanese and European economies.
Furthermore, concern about a strong dollar may be misplaced if its strengthening is due to meaningful tax reform and economic stimulus indicating optimism for growth in the US economy.
6. Markets are naturally volatile
It's important to keep a long-term perspective during periodic corrections. This time last year, the stock market fell sharply in response to slowing growth in China. At the time, the market's tumble caused widespread alarm, but in retrospect, the downturn hardly seems notable. The market quickly regained its losses, China stabilized at a more sustainable growth rate and the broader US economy kept creating new jobs and greater wealth.
With 2017 underway, the US economy remains on sound footing: household wealth is at an all-time high, the stock market is climbing, monetary policy is strongly accommodative and there is plenty of room for further growth.
Despite these strengths, it's possible 2017 could bring an unexpected correction at some point. If that happens, remember that the broader trends are overwhelmingly positive—we're starting the year in a strong position, and reasons for optimism abound.
Jim Glassman is a Managing Director and Head Economist at JPMorgan Chase.