Economic Research: The U.S. Economy Goes From … · Of Shining To As Good As It Gets ... assume a...

Economic Research:

The U.S. Economy Goes From SignsOf Shining To As Good As It Gets

U.S. Chief Economist:

Beth Ann Bovino, New York (1) 212-438-1652; [email protected]

U.S. Economist:

Satyam Panday, New York (212) 438-6009; [email protected]

Table Of Contents

No Easy Pieces On Capitol Hill

On The Jobs Front, Something's Gotta Give

Can American Companies Find A Few Good Men And Women?

Once Goin' South, The Housing Market Continues To Rebound

A Still-Wide Trade Deficit May Cause Heartburn For Uncle Sam

Alternate Scenarios

Upside: A Safe Place

Downside: Little Shop Of Horrors

WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JUNE 29, 2017 1

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Economic Research:

The U.S. Economy Goes From Signs Of Shining ToAs Good As It Gets(Editor's Note: S&P Global's U.S. economists completed their forecast before the Bureau of Economic Analysis published its

third estimate of first-quarter real GDP.)

As President Donald Trump approaches the end of his first six months in office, it seems that he's no closer to fulfilling

his campaign promises than the day he took the helm of the world's biggest economy. And markets have begun to

reflect this view, with sentiment readings, once bolstered by campaign promises, starting to soften.

Relying on the long-standing truth that campaign promises aren't (and often never become) government policy, we

largely discounted last autumn's rhetoric in our December forecast for U.S. economic growth. Now, we no longer

believe the federal government will be able to push through even a small infrastructure-spending package, and we

expect only moderate tax cuts to be passed early next year as midterm elections approach.

Overview

• The U.S. economic expansion will likely continue into the next year, albeit at a modest pace. We expect real

GDP growth of 2.2% this year and 2.3% in 2018.

• We expect the Federal Reserve to announce plans to gradually normalize its balance sheet in September. It

will likely raise rates one more time this year, with the benchmark rate climbing to 1.25%-1.50% by December,

and three more hikes in 2018.

• With roadblocks still in place on Capitol Hill, we don't consider many of President Trump's proposals, as

currently framed, in our baseline forecast. We expect a small tax package to pass later this year, along with

reduced regulation, to help boost growth the next few years. We no longer expect a small infrastructure

initiative will be passed.

• We now see a 15%-20% chance that the U.S. will slip back into recession over the next year as risks of a policy

mistake have eased (previously, we saw a 20%-25% risk of recession).

But even without much help from Uncle Sam, the U.S. economy continues to expand--albeit at a measured pace. S&P

Global never bought into the idea that the U.S. economy could break out of its trend of annual growth of 2%-2.5% and

reach the 3%-4% then-candidate Donald Trump vowed we'd soon see. At this point, we see the only way U.S. GDP

growth will feature a "3" or a "4" is if those figures follow a "2" and a decimal point. Unfortunately for the new

administration, much of the data bear this out.

Specifically, the latest labor-market data have fueled growing pessimism, even after strong employment gains earlier

this year. The Bureau of Labor Statistics' (BLS) May report showing 138,000 job gains carries a margin of error of

50,000 jobs, widening the range to either a respectable 188,000 … or a measly 88,000. Other indicators point to a

still-modest economic expansion, with bumps along the way.


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Table 1

S&P Global Economic Overview

June 2017

(Period average, unless otherwise noted) 2016 2017e 2018e

Real GDP (year % change) 1.6 2.2 2.3

Nominal GDP (year % change) 3.0 4.1 4.5

Real consumer spending (year % change) 2.7 2.5 2.2

Real equipment investment (year % change) (2.9) 2.4 3.3

Real nonresidential construction (year % change) (2.9) 8.7 3.5

Real residential construction (year % change) 4.9 3.9 3.4

Core CPI (year % change) 2.2 1.8 2.1

Unemployment rate (%) 4.8 4.4 4.2

Housing starts (annual total mil.) 1.2 1.2 1.3

S&P/Case-Shiller 20-City Home Price Index (Dec. to Dec. % change) 5.2 6.2 5.8

Federal Reserve's fed funds policy target rate range (year-end %)* 0 - 0.25 1.25 - 1.50 2.00 - 2.25

Note: All percentages are annual average percent change. Core CPI is consumer price index excluding energy and food components. *Assumes

three rate hikes of 25 basis points in 2017 and 2018. e--Estimate.

All told, we expect second-quarter GDP growth of 2.9%--a clear acceleration from the disappointing 1.2% in the first

three months of the year, but still not enough to spur full-year real growth beyond 2.2% (compared with 1.6% in 2016).

And we forecast 2018 growth to merely tick higher, to 2.3%, supported by a small tax-cut package (without the

promised meaningful reform) before the midterm races heat up. We no longer expect even a small public

infrastructure-spending bill will make it into law this year or the next.

No Easy Pieces On Capitol Hill

The Republican-controlled government faces a tough environment as it tries to enact its growth and reform agenda. If

any legislation finds its way through this year, it's likely to be a scaled-down version of initial proposals, and any effect

on the economy won't likely be seen before 2018. Keeping this in mind, in our baseline forecast, we continue to

assume a small fiscal stimulus through tax cuts of around $500 billion starting early next year (with roughly equal

shares to households and corporations), with the fiscal deficit expanding somewhat amid the insistence that faster

growth will pay for the tax cuts in the next decade or so. We no longer assume that Congress will pass a public

infrastructure-spending bill.

Meanwhile, the rollback of regulations may add $5 billion-$10 billion a year to investment growth. We now assume the

closing of special-interest tax loopholes and carried-interest deductions will be of a smaller scale than in our previous

forecast. As before, we expect some of the offsets from cuts to government outlays would be back-loaded in the

decade to avoid triggering automatic sequester spending cuts. We forecast the federal budget deficit to rise to 4.3% of

nominal GDP by 2020, compared with 2.9% last year. Some offsetting revenue would come from a one-time tax on

repatriated foreign earnings of U.S. multinational corporations.

On another front, the U.S. Treasury has deployed extraordinary measures since March 15 to stay below the debt


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Economic Research: The U.S. Economy Goes From Signs Of Shining To As Good As It Gets

ceiling, to add to tensions on Capitol Hill as Congress debates tax policy. We expect the administration will come to an

agreement with Congress to suspend or raise the debt ceiling by the third quarter of this year. It remains our view that

the ensuing debate about raising or suspending the ceiling weighs on the economy and is incorporated in our 'AA+'

rating.

While raising the benchmark federal funds rate 25 basis points (bps) to a range of 1%-1.25% in June, the Federal

Reserve also laid out a framework to normalize its now $4.5 trillion balance sheet. In a plan that will be phased in over

time, the Fed will stop reinvesting the principal of securities when they mature. In this light, we expect policymakers to

pause this cycle of interest-rate hikes to measure the effects of balance-sheet unwinding, which will likely add upward

pressure on long-term interest rates. We now expect the next quarter-point rate increase in December, with three

more in 2018. However, with recent data indicating softer prices, and the core rate still running below 2% year over

year, the Fed will be on guard as to whether this is "transitory" as Fed chair Janet Yellen said during her press

conference after the Federal Open Market Committee meeting in June. But while the large drop in prices for wireless

services may be fleeting, the slower pace of residential price gains is even more important for the Fed, given that rents

have a large weight in the index. We expect core inflation to slowly climb higher in 2018. But if prices remain soft, the

Fed may need to wait longer before it raises rates again.

Chart 1


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All this assumes the economy performs in line with policymakers' expectations and that the balance-sheet

normalization proceeds according to plan. But this is uncharted territory, and it's unclear how much upward pressure

we'll see on interest rates and how quickly the effects are felt. If rates move higher faster than the Fed currently

expects, the Fed may wait until next year to again raise benchmark borrowing costs.

On The Jobs Front, Something's Gotta Give

Our 2017 projection for GDP growth is down from our March forecast of 2.3%, given that we no longer expect the

Republican-led Congress to be able to muster enough votes to support even a modest infrastructure-spending

initiative. We see long-term potential growth slowing to around 1.8%--far below the average of 3% from 1980 to the

early 2000s.

Previously upbeat "soft" data are showing signs of fatigue. While this has some thinking the game is over, we see some

time left on the clock before the expansion ends. We think the "hard" data are typically a better gauge of where this

$18 trillion economy is heading and that the risk of recession remains remote (see "U.S. Business Cycle Barometer,"

published May 5, 2017). Our inaugural U.S. Business Cycle Barometer signals an even smaller risk of a downturn in the

next 12 months than our qualitative assessment risk of recession. Even there, with signs that the risk of a policy

mistake eased globally, we have lowered our qualitative U.S. recession risk to 15%-20% from 20%-25% in our March

forecast.

While the BLS' most recent jobs report was disturbing, let's not forget that May is a notoriously difficult month in

which to get a true reading, given the influx of college students and graduates into the labor market, which can greatly

distort the data. We think that once these temporary factors fade, in June and July, we will likely return to a more

robust pace of job gains.

That said, labor-market growth is slowing as the U.S. nears full employment. The average monthly payroll gain from

March to May was just 121,000. And while headline unemployment, at 4.3%, is the lowest since 2001, and broader

measures of underemployment (such as people working part-time for economic reasons and discouraged workers) are

at 10-year lows, many Americans have left the workforce, either because of early retirement, disability, going back to

school, or simple pessimism at their job prospects--pushing the labor-participation rate to a 39-year low last month.

But, as job gains slowed, job openings reached a record high of 6.04 million in April. This shortage of qualified workers

lends credence to the view that wages will climb higher this year and next, after a modest gain of 2.5% (year over year)

in May. Moreover, the so-called quit rate--the proportion of workers who quit their jobs in any given month, and a

gauge of confidence in the labor market--at 2.1% in April, is near its postcrisis high of 2.2% first seen in January,

according to the BLS. There are also now just 1.14 unemployed workers per job opening, well off the peak of 6.6 in

July 2009.

We see year-over-year wages growing to around 2.75% by year-end, helping to boost consumer spending to a 2.5%

increase for 2017. Retail sales (in nominal terms) fell last month, though after gains of 0.4% and 0.1% in April and

March, respectively. People are also using those paychecks to help buy homes (for themselves or their kids). With both

new and existing home sales well above recession lows, the National Association of Home Builders index is still at a


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firm 67 in May after reaching a 12-year high in March.

Can American Companies Find A Few Good Men And Women?

While companies take a conservative approach to hiring, waiting to see whether any campaign promises become

policy, a growing worry is that the U.S. faces a skills mismatch in which businesses simply can't find workers with the

skills needed to compete. Much of this is due to the never-ending march of automation, which will continue to create

wealth and add to GDP in coming years, while also changing the skills that workers need to succeed (see "Automation

Marches On: Do Jobs Need To Be Collateral Damage?," published June 7, 2017).

We applaud President Trump's remarks at the Roundtable Discussion on Vocational Training with U.S. and German

Business Leaders on March 17, 2017, that "we must embrace new and effective job-training approaches… that prepare

people for trade, manufacturing, technology, and other really well-paying jobs and careers." We also agree with a

report from President Obama's office last year that begins with the premise that investing in and developing artificial

intelligence is something that we need to do--while also espousing the idea that we need to train Americans for the

jobs of the future and help those who have been left behind in the transition toward greater automation.

Our research shows that if the U.S. were to add another year of education to the American workforce, GDP would

likely be $325 billion (or an aggregate 1.8%) higher in five years than in our baseline forecast. During that period, labor

productivity growth would rise 0.2 percentage points faster on average than in our baseline case--and add roughly

755,000 more jobs.

Once Goin' South, The Housing Market Continues To Rebound

Sustained strength in the labor market (along with any extra pocket money from income-tax cuts) would help underpin

consumer spending, which we think will remain an engine of growth in the U.S. With household finances improving on

the back of rising stock prices and home values, consumer sentiment readings are robust--further confirmation that

American households will support economic growth with their willingness to spend.

And while the U.S. housing market slowed this spring, after healthy weather-boosted gains in the first quarter, we

expect renewed strength this year and the next. Together with an upturn in homeownership among young adults,

inventories of homes for sale are low, and there's upbeat homebuilder sentiment. Higher home prices will help offset

increasing costs from lack of readied land and labor shortages.

With the Conference Board's consumer confidence reading a still-robust 117.0 in June, and the University of Michigan

Consumer Sentiment Index at 94.5 this month (near January's 13-year high of 98.5), we expect consumers to feel more

comfortable opening their wallets than they have been through much of the current recovery.

Stronger household balance sheets and fatter paychecks will, in turn, support the housing market. Housing starts, at 1.1

million annualized units in May, have been consistently above the watershed 1 million mark since the spring of 2015.

Single-family starts have risen to their strongest pace since 2007. With single-family building permits--a

forward-looking indicator for starts--also at a 10-year high, we expect housing starts (single- and multi-family


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combined) to reach 1.2 million units this year.

Household formation has averaged 1.2 million the past two years (well above the 0.6 million average increase of the

preceding eight years), which bodes well for residential investment. If anything, supply constraints (the lack of

buildable land and workers) will be what keep homebuilding in check.

A Still-Wide Trade Deficit May Cause Heartburn For Uncle Sam

Meanwhile, on the trade front, American imports and exports have both picked up. Following a lackluster stretch, real

exports increased in the first quarter (albeit from a rather low base), amid firmer global demand and the fading effects

of a strong dollar (see chart). The increase was broad-based, as exports to all regions contributed--with emerging

markets excluding China making up the largest share of growth in the period. On the other side of the ledger, stronger

domestic demand--particularly for capital goods--has boosted imports in the past few months. The trade deficit

widened to $47.6 billion in April, from a revised $45.3 billion in March, as a result of a rise in imports and a decline in

exports.

Chart 2

These flows aren't helping the Trump Administration in its bid to shrink the trade deficit. In the first four months of this


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year, the increase in imports--up 7.5% from the comparable period a year earlier, to $952 billion--easily outstripped the

6.1% gain in exports, to a cumulative $765.6 billion. We look for flows both to and from the U.S. to increase steadily in

the near term as global growth continues to strengthen. Following a meager expansion of 1.1% and 0.4% in real

imports and exports, respectively, last year, we expect imports to rise 3.7% this year and 2.5% in 2018, while exports

grow 2.8% and 3.1%.

The president has raised the specter of invoking national-security interests to erect barriers to imports. (Note that

World Trade Organization rules include a national-security exemption designed to be used only in times of war.) Either

way, the effects on trade flows would be predicated on how hard the administration's protectionist stance is.

Regarding steel, for example, the administration appears set to impose broad tariffs on all imports (hard protection) or

set up a system of quotas and tariff barriers that would essentially freeze imports from particular countries at current

levels and charge tariffs on levels above the quota (soft protection). The hard-tariff route could provoke a messy

scenario in which the U.S.'s trade partners feel compelled to either impose their own national-security restrictions on

steel imports, or to retaliate in other ways. But a limited restriction, which seems more likely at this point, may just be

more symbolic than a meaningful hit to aggregate flows.

Alternate Scenarios

Each quarter, S&P Global projects two scenarios in addition to its base case, one with faster growth than the baseline

and one with slower. Scenarios are based on ordinary risks to baseline growth, not extraordinary risks. Our base case

could be thrown off--in either direction--by policies being put forth by Congressional legislators and the new

administration. On the upside, pro-growth policies, including deregulation and certain aspects of tax reform, could help

accelerate the economy's recovery from the Great Recession. On the other hand, a hit to business confidence would

likely weigh on growth, in our view.

Table 2

S&P Global Economic Outlook

June 2017

--2017-- --2018--

Q1 Q2e Q3e Q4e Q1e 2012 2013 2014 2015 2016 2017e 2018e 2019e 2020e

(Key indicator, % change)

Real GDP 1.2 2.9 2.5 2.4 2.5 2.2 1.7 2.4 2.6 1.6 2.2 2.3 2.0 1.9

(in real terms)

Domestic

demand

1.0 2.8 2.3 2.3 2.4 2.1 1.3 2.4 3.2 1.7 2.3 2.2 2.0 2.0

Consumer

spending

0.6 3.0 2.4 2.8 2.3 1.5 1.5 2.9 3.2 2.7 2.5 2.2 1.9 2.0

Equipment

investment

7.2 3.3 1.6 3.2 4.2 10.8 4.6 5.4 3.5 (2.9) 2.4 3.3 3.3 3.7

Intellectual

property

investment

6.7 5.3 3.5 4.2 5.0 3.9 3.4 3.9 4.8 4.7 4.5 4.0 3.1 3.6


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Table 2

S&P Global Economic Outlook (cont.)

June 2017

--2017-- --2018--

Q1 Q2e Q3e Q4e Q1e 2012 2013 2014 2015 2016 2017e 2018e 2019e 2020e

Nonresidential

construction

28.3 3.5 3.0 2.8 4.4 12.9 1.3 10.3 (4.4) (2.9) 8.7 3.5 3.3 3.7

Residential

construction

13.7 (3.8) 5.1 0.5 5.0 13.5 11.9 3.5 11.7 4.9 3.9 3.4 5.4 4.5

Federal

government

purchases

(2.1) (0.8) (1.1) (1.0) 0.1 (1.9) (5.8) (2.5) 0.0 0.6 (0.8) (0.2) (0.7) (0.4)

State and local

government

purchases

(0.6) (0.2) 1.1 1.2 1.8 (1.9) (0.8) 0.2 2.9 0.9 0.0 1.6 1.3 0.7

Exports of

goods and

services

5.9 1.8 2.9 2.9 3.7 3.4 3.5 4.3 0.1 0.4 2.8 3.2 3.1 3.1

Imports of

goods and

services

3.8 2.0 2.1 2.4 2.9 2.2 1.1 4.4 4.6 1.1 3.7 2.5 3.4 3.7

CPI 2.6 2.0 2.1 1.8 1.6 2.1 1.5 1.6 0.1 1.3 2.1 2.0 2.1 1.9

Core CPI 2.2 1.7 1.7 1.7 1.7 2.1 1.8 1.7 1.8 2.2 1.8 2.1 2.1 1.9

Nonfarm unit

labor costs

2.7 2.7 1.9 2.6 3.0 2.8 1.2 2.7 2.5 2.3 1.4 2.4 1.7 1.6

Productivity

trend ($ per

employee,

2009$)

(0.2) 1.3 0.8 1.0 1.3 0.4 0.6 0.7 0.9 (0.1) 0.9 1.1 1.5 1.6

(Levels)

Unemployment

rate (%)

4.7 4.4 4.4 4.3 4.3 8.1 7.4 6.2 5.3 4.8 4.4 4.2 4.4 4.5

Payroll

employment

(mil.)

145.7 146.1 146.6 147.1 147.5 134.2 136.4 138.9 141.8 144.3 146.4 148.1 149.5 150.7

Federal funds

rate (%)

0.7 0.9 1.1 1.2 1.4 0.1 0.1 0.1 0.1 0.4 1.0 1.6 2.6 2.9

10-year

Treasury note

yield (%)

2.4 2.3 2.4 2.5 2.6 1.8 2.4 2.5 2.1 1.8 2.4 2.7 3.0 3.3

'AAA'

corporate bond

yield (%)

3.2 3.0 3.3 3.5 3.7 2.5 3.1 3.2 3.0 2.7 3.3 3.9 4.4 4.8

Mortgage rate

(30-year

conventional,

%)

4.2 4.0 4.2 4.3 4.4 3.7 4.0 4.2 3.9 3.6 4.2 4.5 5.0 5.4

Three-month

Treasury bill

rate (%)

0.6 0.9 1.0 1.1 1.3 0.1 0.1 0.0 0.1 0.3 0.9 1.6 2.5 2.9

S&P 500 Index 2,324.0 2,391.0 2,399.3 2,402.4 2,404.2 1,379.6 1,642.5 1,930.7 2,061.2 2,092.4 2,379.1 2,411.6 2,447.4 2,520.1

S&P 500

Operating

Earnings (bil. $)

1,004.13 1,072.13 1,085.95 1,113.85 1,141.02 873.57 933.04 1,030.63 928.28 892.43 1,069.02 1,150.74 1,232.65 1,329.01


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Table 2

S&P Global Economic Outlook (cont.)

June 2017

--2017-- --2018--

Q1 Q2e Q3e Q4e Q1e 2012 2013 2014 2015 2016 2017e 2018e 2019e 2020e

Current

account (bil. $)

(467.6) (495.9) (496.0) (507.1) (515.1) (446.5) (366.4) (392.1) (463.0) (481.2) (491.7) (534.1) (559.7) (590.2)

Exchange rate

(Index March

1973=100)

94.4 92.7 92.4 92.2 91.8 73.6 75.9 78.4 90.9 91.6 92.9 91.4 90.9 90.4

Crude oil

($/bbl, WTI)

51.80 50.20 49.60 49.90 50.80 94.20 97.94 93.26 48.74 43.22 50.38 52.30 54.98 57.40

Saving rate (%) 5.2 5.3 5.4 5.3 5.7 7.6 5.0 5.6 5.8 5.7 5.3 5.8 5.8 5.6

Housing starts

(mil.)

1.2 1.2 1.3 1.3 1.3 0.8 0.9 1.0 1.1 1.2 1.2 1.3 1.4 1.5

Unit sales of

light vehicles

(mil.)

17.3 16.9 17.2 17.3 17.2 14.5 15.6 16.5 17.4 17.5 17.2 17.2 17.2 17.2

Federal surplus

(fiscal year

unified, bil. $)

(210) (317) 21 (112) (231) (1,089) (680) (484) (439) (586) (617) (801) (902) (939)

Notes: Quarterly percent change represents annualized growth rate; annual percent change represents average annual growth rate from a year ago. Quarterly

levels represent average during the quarter; annual levels represent average levels during the year. Quarterly levels of housing starts and unit sales of light

vehicles are in annualized millions. Exchange rate represents the nominal trade-weighted exchange value of US$ versus major currencies. Forecasts were

completed before the third estimate of first-quarter 2017 U.S. GDP report was released by the BEA. e--Estimate.

Upside: A Safe Place

In this scenario, the president and Republican Congress would push through tax cuts and deregulation that boost

growth (though still not to the 3% assumed in the administration's budget proposal). The rollback of regulations and

lower tax rates for both corporations and households would spark capital spending, together with increased consumer

demand for goods and services next year. In this scenario, real GDP would expand 2.7% next year (compared with

2.3% in our baseline case), after 2.2% growth this year.

The economy would benefit not only from lower taxes and increased infrastructure spending, but also from reduced

policy uncertainty beginning in the fourth quarter. We assume a federal income-tax reduction in the neighborhood of

$1 trillion stretched over 10 years, with cuts that are roughly equal, proportionately, for companies and individuals. We

also assume Congress would pass a $200 billion (just above 1% of real GDP) public infrastructure-spending plan,

channeled through state and local governments.

Some offsetting revenue would come from a one-time tax on repatriated foreign earnings of U.S. multinational

corporations and the closing of special-interest tax loopholes and carried interest deductions. For the purposes of this

exercise, we assume the offsets from cuts to government outlays would be back-loaded in the decade to avoid

triggering automatic sequester spending cuts.

In this scenario, overall sentiment and domestic demand growth would peak next year. The unemployment rate would

fall to 4% by mid-2018, with an additional 300,000 jobs added by mid-2019 than in our base case. Inflationary


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pressures would be partially offset by increased productivity growth and partly by the Fed's raising rates at a quicker

pace than planned. Continuing oversupply conditions in oil markets would keep energy prices at baseline levels.

The fed funds rate would reach 2.4% by year-end 2018 (2.2% in the baseline), and the yield on 10-year Treasury notes

would reach 3.2% (2.9% in the baseline).

Table 3

S&P Global Economic Outlook--Upside

June 2017

2012 2013 2014 2015 2016 2017e 2018e 2019e 2020e


Real GDP 2.2 1.7 2.4 2.6 1.6 2.2 2.7 2.0 1.8

(in real terms)

Domestic demand 2.1 1.3 2.4 3.2 1.7 2.3 2.7 2.1 1.9

Consumer spending 1.5 1.5 2.9 3.2 2.7 2.5 2.6 2.1 2.0

Equipment investment 10.8 4.6 5.4 3.5 (2.9) 2.4 4.0 3.3 3.2

Intellectual property

investment

3.9 3.4 3.9 4.8 4.7 4.5 4.6 3.1 3.1

Nonresidential construction 12.9 1.3 10.3 (4.4) (2.9) 8.7 4.1 3.3 3.2

Residential construction 13.5 11.9 3.5 11.7 4.9 3.8 3.8 5.3 4.4

Federal government

purchases

(1.9) (5.8) (2.5) 0.0 0.6 (0.8) (0.2) (0.7) (0.4)

State and local government

purchases

(1.9) (0.8) 0.2 2.9 0.9 0.3 2.0 1.1 0.8

Exports of goods and services 3.4 3.5 4.3 0.1 0.4 2.8 3.3 3.0 2.9

Imports of goods and services 2.2 1.1 4.4 4.6 1.1 3.7 3.2 3.1 3.6

CPI 2.1 1.5 1.6 0.1 1.3 2.1 2.0 2.1 2.1

Core CPI 2.1 1.8 1.7 1.8 2.2 1.8 2.1 2.1 2.1

Nonfarm unit labor costs 2.8 1.2 2.7 2.5 2.3 1.4 2.3 1.9 1.8

Productivity trend ($ per

employee, 2009$)

0.4 0.6 0.7 0.9 (0.1) 0.9 1.3 1.5 1.5

(Levels)

Unemployment rate (%) 8.1 7.4 6.2 5.3 4.8 4.4 4.1 4.2 4.3

Payroll employment (mil.) 134.2 136.4 138.9 141.8 144.3 146.4 148.3 149.8 150.9

Federal funds rate (%) 0.1 0.1 0.1 0.1 0.4 1.0 1.8 2.9 3.2

10-year Treasury note yield

(%)

1.8 2.4 2.5 2.1 1.8 2.4 2.9 3.4 3.6

'AAA' corporate bond yield

(%)

2.5 3.1 3.2 3.0 2.7 3.3 4.1 4.7 5.2

Mortgage rate (30-year

conventional, %)

3.7 4.0 4.2 3.9 3.6 4.2 4.7 5.3 5.7

Three-month Treasury bill

rate (%)

0.1 0.1 0.0 0.1 0.3 0.9 1.8 2.9 3.2

S&P 500 Index 1,379.6 1,642.5 1,930.7 2,061.2 2,092.4 2,377.6 2,444.7 2,500.2 2,562.6

S&P 500 Operating Earnings

(bil. $)

873.6 933.0 1,030.6 928.3 892.4 1,068.3 1,169.7 1,264.7 1,357.1

Current account (bil. $) (446.5) (366.4) (392.1) (463.0) (481.2) (491.7) (544.7) (573.0) (612.7)


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Table 3

S&P Global Economic Outlook--Upside (cont.)

June 2017

2012 2013 2014 2015 2016 2017e 2018e 2019e 2020e

Exchange rate (Index March

1973=100)

73.6 75.9 78.4 90.9 91.6 92.9 91.7 91.2 90.7

Crude Oil ($/bbl, WTI) 94.20 97.94 93.26 48.74 43.22 50.38 52.47 55.21 57.00

Saving rate (%) 7.6 5.0 5.6 5.8 5.7 5.3 6.0 5.9 5.7

Housing starts (mil.) 0.8 0.9 1.0 1.1 1.2 1.2 1.3 1.4 1.5

Unit sales of light vehicles

(mil.)

14.5 15.6 16.5 17.4 17.5 17.2 17.2 17.2 17.3

Federal surplus (fiscal year

unified, bil. $)

(1,089) (680) (484) (439) (586) (610) (873) (994) (1,043)

Note: Quarterly percent change represents annualized growth rate; annual percent change represents average annual growth rate from a year

ago. Quarterly levels represent average during the quarter; annual levels represent average levels during the year. Quarterly levels of housing

starts and unit sales of light vehicles are in annualized millions. Quarterly levels of CPI and core CPI represent year over year growth rate during

the quarter. Exchange rate represents the nominal trade-weighted exchange value of US$ versus major currencies. e--Estimate.

Downside: Little Shop Of Horrors

In our downside scenario, the recent rise in equity markets would turn out to be temporary, President Trump's

campaign promises would fail to materialize meaningfully, and political paralysis would create only more uncertainty

for business investment. This would accompany faltering productivity and a weak pace of household income and

spending growth.

Together, real GDP growth would slip to 1.8% this year and 1.6% in 2018, before rebounding to 2.1% in 2019.

In this scenario, persistent weak productivity growth and a U.S. stock market pullback of 13% spanning late-2017 to

early-2018 would shatter business and consumer confidence. The unemployment rate would tick up to 4.8% by the

end of next year, compared with 4.2% in our baseline. As such, it wouldn't be surprising that consumers would focus

on saving and continue to shed debt in the near term. Weaker growth in household income and wealth would translate

into just a 1.3% increase in consumer spending next year (compared with 2.2% in our baseline). Real gross domestic

demand would take a hit, rising only 1.3%.

Low demand would put a lid on inflation, with annual headline inflation slowing to 1.7% and 1.6% in 2018 and 2019,

respectively, after coming in at 2.1% this year. Meanwhile, productivity would fail to rise as U.S. businesses postpone

significant capital investments, keeping unit labor costs higher than in our baseline case--thus diminishing the

competitiveness of U.S. exports. In response to all this, the Fed would cut rates heading into next year by 25 bps and

wait until the end of 2018 before raising rates again, only after confirming the economy is back on a sustainable growth

path.


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Table 4

S&P Global Economic Outlook--Downside

June 2017

2012 2013 2014 2015 2016 2017e 2018e 2019e 2020e


Real GDP 2.2 1.7 2.4 2.6 1.6 1.8 1.6 2.2 2.3

(in real terms)

Domestic demand 2.1 1.3 2.4 3.2 1.7 1.9 1.4 2.2 2.4

Consumer spending 1.5 1.5 2.9 3.2 2.7 2.2 1.4 2.3 2.2

Equipment investment 10.8 4.6 5.4 3.5 (2.9) 1.3 1.8 2.7 3.6

Intellectual property

investment

3.9 3.4 3.9 4.8 4.7 3.5 2.6 2.5 3.4

Nonresidential construction 12.9 1.3 10.3 (4.4) (2.9) 7.7 2.1 2.7 3.5

Residential construction 13.5 11.9 3.5 11.7 4.9 0.4 2.3 4.2 7.8

Federal government

purchases

(1.9) (5.8) (2.5) 0.0 0.6 (0.8) (0.2) (0.7) (0.4)

State and local government

purchases

(1.9) (0.8) 0.2 2.9 0.9 0.1 1.3 1.3 1.2

Exports of goods and

services

3.4 3.5 4.3 0.1 0.4 2.6 3.2 4.2 3.5

Imports of goods and

services

2.2 1.1 4.4 4.6 1.1 2.9 1.5 4.0 3.9

CPI 2.1 1.5 1.6 0.1 1.3 2.0 1.7 1.7 1.4

Core CPI 2.1 1.8 1.7 1.8 2.2 1.8 1.8 1.5 1.4

Nonfarm unit labor costs 2.8 1.2 2.7 2.5 2.3 1.3 2.2 1.1 1.0

Productivity trend ($ per

employee, 2009$)

0.4 0.6 0.7 0.9 (0.1) 0.7 0.8 1.6 1.8

(Levels)

Unemployment rate (%) 8.1 7.4 6.2 5.3 4.8 4.6 4.6 4.7 4.6

Payroll employment (mil.) 134.2 136.4 138.9 141.8 144.3 146.4 148.1 149.5 150.6

Federal funds rate (%) 0.1 0.1 0.1 0.1 0.4 0.9 0.7 1.6 2.3

10-year Treasury note yield

(%)

1.8 2.4 2.5 2.1 1.8 2.2 1.8 1.9 2.6

'AAA' corporate bond yield

(%)

2.5 3.1 3.2 3.0 2.7 3.0 3.0 3.3 4.2

Mortgage rate (30-year

conventional, %)

3.7 4.0 4.2 3.9 3.6 4.0 3.6 3.9 4.8

Three-month Treasury bill

rate (%)

0.1 0.1 0.0 0.1 0.3 0.8 0.6 1.6 2.3

S&P 500 Index 1,379.6 1,642.5 1,930.7 2,061.2 2,092.4 2,367.6 2,164.0 2,314.1 2,411.8

S&P 500 Operating

Earnings (bil. $)

873.57 933.04 1,030.63 928.28 892.43 2,060.82 3,412.59 1,378.06 1,379.31

Current account (bil. $) (446.5) (366.4) (392.1) (463.0) (481.2) (469.3) (523.5) (490.8) (438.9)

Exchange rate (Index

March 1973=100)

73.6 75.9 78.4 90.9 91.6 93.0 90.6 89.9 89.8

Crude oil ($/bbl, WTI) 94.20 97.94 93.26 48.74 43.22 48.35 49.34 54.38 57.89

Saving rate (%) 7.6 5.0 5.6 5.8 5.7 5.4 5.6 5.6 5.4


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Table 4

S&P Global Economic Outlook--Downside (cont.)

June 2017

2012 2013 2014 2015 2016 2017e 2018e 2019e 2020e

Housing starts (mil.) 0.8 0.9 1.0 1.1 1.2 1.2 1.3 1.3 1.4

Unit sales of light vehicles

(mil.)

14.5 15.6 16.5 17.4 17.5 16.8 16.5 16.6 16.6

Federal surplus (fiscal year

unified, bil. $)

(1,089) (680) (484) (439) (586) (614) (721) (800) (808)

Note: Quarterly percent change represents annualized growth rate; annual percent change represents average annual growth rate from a year

ago. Quarterly levels represent average during the quarter; Annual levels represent average levels during the year. Quarterly levels of housing

starts and unit sales of light vehicles are in annualized millions. Quarterly levels of CPI and core CPI represent year over year growth rate during

the quarter. Exchange rate represents the nominal trade-weighted exchange value of US$ versus major currencies. e--Estimate.

Writer: Joe Maguire


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