December 15, 2016
U.S. real gross domestic product (GDP) grew by 3.2 percent in the third quarter, according to the second reading, up from 1.4 percent in the second quarter. We expect output to rise by around 2 percent on average in coming quarters, a bit faster than the trend rate over the past year, as drags from past dollar strength and an inventory adjustment cycle fade. The policy outlook has become more uncertain with the election, though early indications that fiscal easing will be prioritized in the new administration suggest that the risks to real GDP growth in 2017 and 2018 are now skewed to the upside.
The U.S. labor market continues to strengthen, as seen in the impressive growth in the size of the labor force. In the year through November, the labor force participation rate increased by 0.2 percentage point while the unemployment rate declined by 0.4 percentage point.
Source: Guggenheim Investments, Haver Analytics, Bureau of Labor Statistics. Data as of 12.13.2016.
The labor market continues to strengthen, as seen in the impressive growth in the size of the labor force. In the year through November, the labor force participation rate increased by 0.2 percentage point while the unemployment rate declined by 0.4 percentage point to 4.6 percent. The cyclical rise in participation, itself a response to a tighter labor market, is all the more noteworthy given that the structural participation rate is falling by about 0.25 percentage point per year due to the aging U.S. workforce. This rise in participation helped slow the drop in the unemployment rate and the pace of Fed rate hikes in 2016.
Past declines in energy prices have suppressed headline inflation, but the energy drag is set to reverse over the next six months as base effects kick in. Incorporating our updated oil price model, we project that headline CPI inflation will rise from 1.6 percent in October to 2.5 percent in the first quarter of 2017 before falling back toward 2 percent.
We expect Fed policymakers to follow their recent rate increases with three, and possibly four, more hikes in 2017. While this would be faster than markets are now pricing in, it would still leave rates below levels prescribed by standard policy rules. President-elect Trump will have an opportunity to fill two open seats on the Board of Governors, though this should not affect Fed policy in the near term.
Meanwhile, monetary policy divergence will continue to support the U.S. dollar. The ECB has extended quantitative easing (QE) at a pace of €60 billion per month through at least the end of 2017, while the BoJ is far from reducing stimulus. In our view, their QE programs continue to buttress global sovereign debt and credit markets.
Incorporating our updated oil price model, we project that headline CPI inflation will rise from 1.6 percent in October to 2.5 percent in the first quarter of 2017.
Source: Guggenheim Investments, Bloomberg, IHS Markit. Data as of 12.2.2016.
—Brian Smedley, Head of Macroeconomic and Investment Research; Maria Giraldo, CFA, Vice President
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