By ELLIOT EISENBERG, GraphsandLaughs, LLC, Elliot@graphsandlaughs.net
The combination of solid, widespread global growth; strong labor markets; low inflation; improving commodity prices; a slightly weaker dollar; and continued easy monetary policy from most central banks sets the stage for a good year. Moreover, the recently passed front-loaded tax cuts here in the U.S. will help by adding a pleasant tailwind to the domestic economy.
However, there are also economic headwinds. The fear of inflation could spook the Federal Reserve to raise rates more rapidly than expected, which would slow growth and unsettle financial markets. With the now low tax rate on repatriated earnings, American firms might bring back substantial profits from abroad, and in the process, boost the dollar, which will hurt manufacturing activity. Lastly, geopolitical problems always lurk and could easily have negative growth implications.
With all this in mind, I expect full-year 2018 GDP to come in at 2.6 percent, slightly higher than the 2.3 percent growth experienced last year and the 2.1 percent average rate of growth since the end of the Great Recession.
Headline inflation looks to pick up from roughly 2 percent to 2.3 percent in 2018, while core inflation (which excludes food and energy) will edge up only slightly. Because of the slow rise in core inflation, the Federal Reserve will probably have the luxury of time to raise the federal funds rate from where it is now, at 1.375 percent, to 2.125 percent by year’s end.
The unemployment rate will fall to 3.6 percent or even 3.5 percent by year end, a rate not seen since the late 1960s! As the labor market tightens, nominal wage growth should increase in 2018, with average annual wage increases rising from 2.4 percent to 2.75 percent by the end of the year: a healthy rise.
The rate on 30-year mortgages will be at or near 4.40 percent by the end of 2018. However, continued easing of credit conditions and rising consumer spending due to continued strong employment growth and better wage growth will keep the economy and housing market on track.
Housing starts should increase by about 7 percent, to 1.29 million. Single-family starts will likely total 930,000, up from 850,000, while multifamily starts should flat line at about 360,000. New and existing home sales should collectively rise by about 3 percent and end the year at 6.35 million, with mortgage purchase volume advancing by $100 billion, and refinance activity falling by about $200 billion due to the rise in mortgage rates.
Housing inventories will, regrettably, remain unchanged, and combined with limited new home building, home prices will rise by 5 percent. The chances of a recession in 2018 is low given the very solid global economic conditions that currently prevail. I peg the chances of a recession in 2018 at just 15 percent.
Elliot Eisenberg, Ph.D. is president of GraphsandLaughs, LLC and can be reached at Elliot@graphsandlaughs.net. His daily 70-word economics and policy blog can be seen at www.econ70.com.