United States: More signs of a maturing cycle

Our scenario for the US going into 2018 sees GDP (Gross Domestic Product) growth slow slightly to 2.2% – see chart IV – (versus a consensus of 2.5%) and inflation pick up somewhat – developments that would be quite natural for an economy entering its ninth year of expansion.

Private consumption is likely to decelerate in a context of slowing job creation and muted wage growth. Investment, on the other hand, has room to expand: capacity is looking increasingly constrained and in need of a boost. Trade can also be expected to contribute positively to growth, thanks to the lagged effect of a weaker dollar. Finally, the public sector’s contribution to growth should remain slightly negative, as federal government spending is projected to remain stable while some consolidation is likely at the state and local levels.

On the inflation front, the October CPI (Consumer Price Inflation) report, which saw the core price index firm for the first time this year, might prove a turning point. While most economists expect inflation to remain tame in the near term, we would point out that the trend in US inflation has historically lagged GDP growth by several quarters. As such, “disappointing” inflation during most of 2017 could be partly explained by the weak economic growth experienced towards the end of 2015 and into early 2016. We thus see further upside for inflation as 2018 unfolds, although not to the point of an overheating that would force the Federal Reserve (Fed) to accelerate its hiking process.

Strong macro data, as well as the minutes from the last Fed meeting, have confirmed expectations that a December rate hike remains the most likely outcome, taking the Fed funds rate to 1.50%. Our own assumption continues to be for two further hikes in 2018, alongside the ongoing balance sheet shrinkage that should amount to some USD 350 billion. After having eased considerably during 2017 (thanks to strong performance by risky assets and a softer US dollar), financial conditions thus look set to remain broadly neutral during the coming quarters. That said, we will certainly be keeping a close watch for any signs of them tipping into more restrictive territory – as this is the most typical way an expansion ends.

On the political front, the mid-term Congressional elections will be a risk event worth monitoring. While November 2018 is still distant, the possibility that the Republican party sustains a defeat that could cost it its Senate or House majority could change the political landscape for the 2^nd half of Trump’s presidency.