US Economic Outlook

sigma research, 3 November 2017

Kurt Karl
Chief Economist, Head ER&C The economy added 261,000 jobs in October as leisure and hospitality jobs
Kurt_Karl@swissre.com recovered from the Harvey and Irma hurricanes. Despite the hurricanes, real Gross
Annabelle De Gaye Domestic Product (GDP) rose 3% in 3Q17, led by a rise in inventories and vehicle
Senior Economist
sales after the hurricanes, plus higher net exports. As a result, the Fed is still expected
Annabelle_DeGaye@swissre.com
to hike rates in December, which was confirmed by the Oct/Nov monetary policy
meeting where the committee indicated that the economy was "rising at a solid rate"
Reconstruction efforts will help and that the hurricanes were not likely to affect economic activity in the medium
boost growth to 2.2% this year term. The President has chosen Jerome Powell as the Fed chair, a current governor
and next. on the Fed Board, and as such a source of continuity in the Fed's policymaking, a
positive for the economy. The Administration presented its tax proposals, with
significant cuts in corporate and personal income tax rates, partially offset by reduced
subsidies. The assumption in our baseline forecast is that the impact of the final tax
cuts will be fairly small. The NAFTA renegotiations took a negative turn with the
Administration proposing terms that are unacceptable to Mexico and Canada. As
with the tax proposals, it remains to be seen what the final outcome will be. Our
assumption is that NAFTA will be maintained with some small changes, but there is a
risk that it is cancelled which would weaken US GDP output by up to 0.5%. Real GDP
is forecast to grow by 2.2% in 2017, 2018 and 2019. The 10-year Treasury yield is
still expected to be 2.6% by end-2017 and 3.2% by end-2018.
Real GDP grew by a robust 3% in Real GDP grew by 3.0% in 3Q17 (seasonally adjusted annual rate). Consumer
3Q17. spending rose by 2.4% in the quarter, slower than in 2Q17. Private fixed non-
residential investment was up 3.9%, while residential investment declined by 6.0%.
Exports increased by 2.3% and imports decreased by 0.8%.
Employment increased by The economy created 261,000 jobs (establishment survey) in October rebounding
261,000 in October, the from the hurricane-induced weakness of September. The unemployment rate fell to
unemployment rate edged down 4.1% (household survey) as the participation rate fell by 0.4 percentage point
and wages stabilized.
probably because of the hurricanes. Wages were little changed as private sector
hourly earnings averaged USD 26.53 in October, bringing the yoy growth to 2.4%.
Manufacturing hours rose 0.3 to 41.1 in October, which will boost Q4 production.
Housing had a weak month again Housing starts fell in September, to 1,130 (all figures in thousands, annualized) from
in September, but builder 1,180 the prior month, and both existing and new home sales dropped. Starts have
optimism picked up in October been trending down since February of this year. Building permits, which were
indicating a positive growth stronger in August (at 1,272) also declined in September 1,225. Home prices rose
potential.
0.5% mom in August, and 6.1% yoy according to the Case-Shiller national home
price index, indicating that housing supply is still tight. Meanwhile, builder optimism
picked up slightly in October, with the NAHB/Wells Fargo Housing Market Index up
to 68. Index values above 50 indicate more builders view conditions as 'good' than
'poor', so housing activity is expected to improve into 2018.
History Forecast Annual Data
US Forecast Summary: 17Q2 17Q3 17Q4 18Q1 18Q2 18Q3 18Q3 2016 2017 2018 2019
The GDP and interest rate
forecasts are unchanged Real GDP, % Change, SAAR 3.1 3.0 2.7 1.7 2.0 1.9 2.0 1.5 2.2 2.2 2.2
% Change, Year Ago 2.2 2.3 2.5 2.6 2.3 2.1 1.9
compared with last month.
CPI, % Change, SAAR -0.3 2.0 4.9 3.4 0.7 2.5 2.9 1.3 2.2 2.6 2.5
% Change, Year Ago 1.9 2.0 2.4 2.5 2.7 2.9 2.4

Core CPI, % Change, SAAR 0.6 1.7 3.2 3.3 1.5 1.7 3.2 2.2 1.9 2.3 2.5
% Change, Year Ago 1.8 1.7 2.0 2.2 2.4 2.4 2.4
End of period
Fed Funds Rate (Target mid-range) 1.125 1.125 1.375 1.375 1.625 1.875 2.125 0.625 1.375 2.125 2.875
3-Month Treasury Bill 1.0 1.1 1.3 1.4 1.6 1.9 2.1 0.5 1.3 2.1 2.8
5-Year Treasury Note 1.9 1.9 2.2 2.3 2.5 2.7 2.9 1.9 2.2 2.9 3.5
10-Year Treasury Note 2.3 2.3 2.6 2.7 2.9 3.0 3.2 2.5 2.6 3.2 3.6

sigma research | Swiss Re Institute 3 November 2017 1

US Economic Outlook

10-year Treasury rates and the Fed 14

funds target rate: The 10-year
government yields are still very low 12
despite some recent hikes in the Fed
10
funds rate. The Fed is expected to
continue raising rates in December 8
2017 and next year and this is
forecast to increase the yield on the 6
10-year T-note, as it has done in the
past. 4

0
Jan-85
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Target Fed Funds 10-yr T-note
Source: Datastream
Income stabilized but consumption Real disposable income was flat in September and up 1.2% yoy. Real consumer
increased in September and will spending increased by 0.6% mom in September, bringing the yoy number to 2.7%
likely continue improving given (after 2.5% the previous month). This trend should be sustained as implied by the
high consumer confidence. recent pick up in the Conference Board consumer confidence index, at 125.9 in
October (after 120.6 in September). Both present situation and expectation
subindices were up. After the big rise in September, auto sales decreased slightly to a
still-high 18 million in October (annualized rate, after 18.6 in September).
Consumers are replacing the lost vehicles from the hurricanes.
Industrial production was slightly Manufacturing industrial production increased by 0.1% mom in September, up only
up in September but the 1.1% yoy. This contrasts with the relatively high Purchasing Manager's Index, which
Manufacturing PMI fell in October. however dipped in October to 58.7 after 60.8 in September. Although the PMI
generally tends to lead improvements in industrial production (IP), it is now far ahead
of IP. The gap is likely to be closed somewhat in October as the manufacturing hours
imply a sharp uptick in manufacturing production. The non-manufacturing PMI rose
to 60.1 in October from 59.8 in September, indication Q4 GDP growth will be
strong. In a separate report, shipments of core capital goods (excluding defense and
aircraft) rose 0.7% mom in September, while these orders were up 1.3%, indicating a
good performance for equipment investment in Q5. Both are up so far in 2017
compared to 2016 3.3% and 3.8%.
All-items inflation accelerated to The all-items Consumer Price Index rose 0.5% mom in September, up 2.2% yoy a
2.2% yoy in September mainly due jump from August's 1.9% yoy increase, as gasoline prices continued to rise due to
to gasoline prices while core hurricane related refinery shutdowns. Core inflation rose 0.1% mom, sustaining a five
inflation remained stable at 1.7%. month streak of 1.7% yoy inflation. Although average wage gains were close to 2.5%
for the last 2 years, a look at historical trends suggests that it would take higher wage
growth for core inflation to increase to a sustainable 2% level. Indeed average wage
growth before the 2008 crisis was 3.4% (average monthly y-o-y growth rates
between 1995 and 2007), when core CPI inflation averaged 2.3%. In parallel,
currently low levels of unemployment would imply higher wage growth, closer to the
3-4% range, which is why there is so much questioning of the Phillips curve.
The yield on the 10-year Treasury The November FOMC meeting further confirmed expectations of a rate hike in
note is expected to reach 2.6% by December (by 25 basis point). Next year, we anticipate three more policy rate
end-2017 and 3.2% by end-2018. increases. Meanwhile, the Fed undertook its balance sheet normalization program in
October, which should impact long term rates. The 10-year note is projected to be at
2.6% by end-2017 and 3.2% by end-2018.
This document, prepared by Swiss Res sigma research, Swiss Re Institute, is for information purposes only. It is not intended as an offer or solicitation for the
purchase or sale of any financial instrument. The information contained in this document has been obtained from sources believed to be reliable; however, its
accuracy and completeness cannot be guaranteed. The views reflected herein are subject to change without notice.

sigma research | Swiss Re Institute 3 November 2017 2