GSU Forecasts Decisive Year Ahead For Federal Reserve

GSU Forecasts Decisive Year Ahead For Federal Reserve

ATLANTA–Look for new Federal Reserve Chair Jay Powell, who succeeded Janet Yellen at the end of January, to set forth multiple Federal Reserve rate hikes this year, according to Rajeev Dhawan of the Economic Forecasting Center at Georgia State University’s J. Mack Robinson College of Business.

“Three is a safe bet based on my projections for growth,” Dhawan wrote in his “Forecast of the Nation,” released Feb. 28, 2018. “But this first one, expected in March, may get delayed if financial markets are in turmoil.”

Dhawan points out that the markets had a near correction in February and the 10-year bond rate spiked 50 basis points since early January. Financial markets are fearful about inflation. The forecaster notes they seem to be heading toward a correction because of these inflation fears.

“The seed of this inflation fear was planted with the release of the Jan. 26 gross domestic product (GDP) report showing 2.6 percent growth for the fourth quarter, a drop from 3.2 percent growth in the third quarter,” said Dhawan. “The reason for this slowdown was that hurricane rebuilding efforts lifted third-quarter GDP growth somewhat and faded by the fourth quarter.”

The personal consumption expenditure (PCE) deflator, which measures prices paid by consumers for goods and services, also reached a four-year high and came in near the Fed’s 2.0 percent target inflation rate, causing a late January sell-off.

“What really ignited the fire,” Dhawan said, “was the employment report released in early February, which showed not only a solid gain of 200,000 new jobs, but, more importantly, a jump of 2.9 percent in wage growth.”

The markets were already skittish, he said. This bump up in wage inflation just fueled the fire and resulted in a 1,200-point drop in the Dow index.

“The recent volatility in markets is of concern, mainly due to exaggerated fears of inflation materializing rather than reality,” Dhawan said.

Despite the fear of a stock market correction, most consumers should have something to look forward to in 2018.

“Personal income tax cuts will put more money in most people’s pockets,” Dhawan wrote. “Additionally, tightening in the labor market produces wage inflation.”

The additional consumer spend because of these gains will stimulate business demand and allow for GDP growth near 3.0 percent in the first half of 2018. Dhawan points to business investment to keep the ball rolling through the rest of the year.

“The tech investment rate is the best predictor of future job and income growth,” he said. “It should go up to 8.5 percent in 2018, and, along with an increase in the equipment investment rate, we should see 3.1 percent GDP growth in 2018.”

This growth estimate led Dhawan to forecast the last two rate hikes of 2018. He predicts a moderation in GDP growth for 2019 and 2020. Dhawan also predicts the 10-year bond rate, which averaged 2.3 percent in 2017, will rise to 3.2 percent in 2018.

“Housing starts will average 1.25 million over the next three years, unable to push higher due to rising mortgage rates and skittish, millennial first-time buyers,” Dhawan said.

Without housing starts moving to the 1.5 million mark because of the above factors, the economy will be unable to sustain a 3.0 percent-plus growth rate.

“Another way to try to push GDP higher is through vehicle sales,” Dhawan said. “But, if you have used every trick of financing to give subprime borrowers a vehicle in the last five years, you can’t milk this avenue anymore as rates rise.”

Highlights from the Economic Forecasting Center’s National Report

• Following GDP growth of 2.3 percent in 2017, the economy will expand at 3.1 percent in 2018, 2.5 percent in 2019 and 2.0 percent in 2020.
• Business investment grew 4.7 percent in 2017. Expect growth to settle at 6.5 percent in 2018, 5.4 percent in 2019 and 4.3 percent in 2019. Jobs will grow by a monthly rate of 191,200 in 2018, 177,200 in 2019 and 134,000 in 2020.
• Housing starts will average 1.253 million units in 2018, fall slightly to 1.238 in 2019 and rise again to 1.274 in 2020. Expect auto sales of 17.1 million units in 2018, 16.4 in 2019 and 16.1 in 2020.
• The 10-year bond rate will average 3.2 percent in 2018, 3.8 percent in 2019 and 4.1 percent in 2020.