Employment Report Disappoints but Probably Won’t Delay Federal Reserve’s Tapering Plan

The September employment report disappointed analysts; will it also complicate the Federal Reserve’s plan to begin withdrawing the monetary support that has cushioned the economy throughout the pandemic?

Read More

‘Tis the season for economic forecasts, and we’ve assembled a few for your information – or your amusement, if you enjoy measuring how far from the bulls-eye many of these projections often land. As a group, economic forecasters have traditionally done better than political pollsters, though, admittedly, that’s not a particularly high bar.

Until a few weeks ago, most of the forecasts for next year assumed that Clinton would win the election. Many analysts have since adjusted their predictions for growth, interest rates and housing demand – some up and some down, depending on how they think Trump’s election and his policies will affect those key economic indicators and others.

Freddie Mac: “Economic growth will improve with some sort of fiscal stimulus early in the year, probably one including a mix of infrastructure spending and tax cuts. This should lead to higher growth than predicted earlier. However, [this anticipated growth] could be offset by rising rates, resulting in only a 1.9 percent increase for the entire year….Labor markets will hold steady, and inflation, which has been ticking higher recently, will continue to do so.”

Fannie Mae: "Depending on the incoming President's policy priorities, our forecast for 2017 is subject to both upside and downside risks. For example, we expect near-term growth would get a boost from any tax cuts and spending increases that are made, but if new policies result in sharply higher tariffs on China and Mexico, rethinking the Trans-Pacific Partnership, and renegotiating the North American Free Trade Agreement, it would likely drag on growth."

Hugh Johnson, chairman and chief investment officer, Hugh Johnson Advisors: "The economy has been expanding since 2009, the unemployment rate has declined and we are arguably at full employment… Although we'll continue to have gains in employment, the gains will become tougher and tougher to come by."

Reuters: “Trump's plan to increase infrastructure spending and slash taxes could encourage companies to boost hiring and spur an even faster pace of economic growth over the coming years.”

Organization for Economic Cooperation and Development: Fiscal stimulus should boost growth next year, but “worsening protectionism and the threat of trade retaliation could offset much of the fiscal initiatives' impact on domestic and global growth, leaving countries with a poorer fiscal position as well."

MONEY MAGAZINE: “[Investors] believe Trump’s victory, coupled with his party’s control over both houses of Congress, will usher in an era of increased spending on infrastructure, unprecedented tax cuts, and protectionist trade policies — all of which will lead to increased inflation.

WALL STREET JOURNAL – SURVEY OF ECONOMISTS: “The presidency of Donald Trump is poised to usher in a new era for the U.S. economy that forecasters say could boost economic growth, bring higher interest rates and inflation, and a new set of potential risks including international trade wars.”

DANSKE BANK: “In the short term, we do not expect growth to be hit by Trump uncertainties through lower confidence and hence we expect the economy to continue to grow around 2%. In the medium to long term, uncertainty is set to rise and we think the negative effects of more protectionism and tougher immigration policy will dominate the possible positive effects of less regulation, lower taxes and infrastructure spending.”

INTEREST RATES

The Federal Reserve will raise interest rates later this month. This is a consensus forecast – it is hard to find anyone who isn’t expecting a rate hike. The moon and stars – and economic indicators – all seem to be pointing clearly in that direction. Any lingering doubts were pretty much erased by the November labor report – employers added 178,000 jobs for the month and the unemployment rate fell to a nine-year low. Other positive reports (third quarter GDP stronger than expected, leading economic indicators up in October, consumer confidence and consumer spending up as well) provide additional evidence, if the Fed needs it, that the economy can absorb a rate hike. Key question, of course, is what happens next year. Will more rate increases follow and if so, how many, how fast, and how high?

Freddie Mac: "With the labor market at full employment and inflation showing signs of picking up, we anticipate the FOMC will move more than once in 2017 pushing short-term interest rates higher, with the 1-year Treasury rate reaching 1.5 percent by the fourth quarter of 2017."

Kiplinger: “Expect interest rates to rise gradually after December 14. They will be more volatile now, as fears about the deficit wax and wane. But unless those concerns deepen considerably, rates should show only a modest uptrend.”

Forbes: Fed rate hikes are likely to be at ‘half-throttle,’ about one-and-one-half percentage points per year for two years…Two years from now, at the end of 2017, the Fed Funds rate will sit at 3.25 percent. Relative to the core inflation rate of 2%, this will be just a hair below normal. For most of the coming two years, then, short-term rates will be well under historic norms.”

Jonathan Smoke, chief economist, Realtor.com: “The 40 basis points increase in rates in the days following the election has caused us to increase our interest rate prediction for next year (up to 4.5 percent)…With more than 95 percent of first-time home buyers dependent on financing their home purchase, and a majority of first-time buyers reporting one or more financial challenges, the uptick we’ve already seen may price some first-timers out of the market.”

HOUSING

Mortgage rates have trended upward since the election, and the expectation that this trend will continue has muted forecasts for the housing market.

Freddie Mac: The housing market should be able to withstand moderately higher rates, but refinancing activity “will be crushed.”

Fannie Mae: "Demand from first-time buyers has increased with household formation and is outpacing supply, leading to significant price increases and affordability challenges for entry-level buyers….Home purchase affordability will be constrained further if the recent pickup in mortgage rates persists, which would present a downside risk to our forecast of housing and mortgage activity."

Realtor.com: Millenials and boomers “will dominate the market,” price appreciation will slow, and inventories will remain skimpy in many markets. “Prior to this month’s election, demographics and an improving economy were laying the foundation for a substantial increase in first-time buyers in 2017…. [Higher interest rates reflect] the anticipation of stronger economic and wage growth next year, both of which favor buyers. [But] they will make qualifying for a mortgage and finding affordable inventory more challenging….With more than 95 percent of first-time home buyers dependent on financing their home purchase, and a majority of first-time buyers reporting one or more financial challenges, the uptick we’ve already seen may price some first-timers out of the market.”

National Association of Home Builders: “Our analysis indicates that prices will continue to rise as inventories of new and existing homes remain tight….And while single-family construction will continue to expand in 2017, the rate at which the industry can grow is limited by the amount of workers and access to building lots for builders to meet rising housing demand. As long as single-family production remains below historical norms, as it will for the next few years, home prices will continue to rise.”

Zillow: “More millennials will become homeowners, driving up the homeownership rate. Millennials are also more racially diverse, so more homeowners will be people of color, reflecting the changing demographics of the United States.”

Kroll Bond Rating Agency: “No amount of prospective regulatory relief or changes in the rules for loan guarantees in Washington can fully offset the dampening effect of rising interest rates on the home finance sector... With interest rates rising, the economic and financial environment for the U.S. housing market is going to become progressively less hospitable.”