US: Forecasts affected by uncertainty  - Wells Fargo

Analysts from Wells Fargo made little changed to its economic forecast for the US and they highlight the uncertainty related with fiscal policy. They expect two rate hikes from the Federal Reserve in 2017.

Key Quotes: 

“We are challenged in the outlook given the high level of uncertainty on what will be the explicit actions undertaken by policymakers. We know the intended outcomes—we await the realization. For now, we have left our 2017 forecast alone as it is unlikely that fiscal policy will materially change for the current calendar year.”

“However, we anticipate that market actors will move in anticipation of fiscal policy actions and that fiscal, monetary and regulatory policy actions will affect economic activity as 2018 approaches.”

“We expect a gain in real personal consumption of 2.7 percent this year—that is essentially unchanged from our last monthly forecast. For 2018, we have upwardly revised our call for real PCE growth by approximately 0.4 percentage points compared to our previous call, as personal income is expected to increase due to the administration’s proposal to lower income taxes across the board for individuals. Business tax reform and a lighter regulatory burden have lifted our outlook for equipment spending. From a cyclical perspective, however, rising wage costs as the labor market tightens should also support stronger capital spending.”

“On the prices front, stronger demand with limited room on the supply-side in the short-run will move inflation nearer to the Fed’s 2 percent target following the rebound in energy prices over the past year, although core inflation is expected to edge up only gradually. Stronger economic growth and higher inflation will prompt the Fed to raise rates twice this year.”

“We have not materially changed our 2017 real GDP forecast given that we already revised government spending last November following the election to account for greater defense spending. This month, we have adjusted our 2018 real GDP growth forecast up by 0.2 percentage points. On the monetary policy front, our forecast remains two fed funds hikes in 2017 and three hikes in 2018.”