US economic outlook: uncertainty and strong dollar risks - Nomura

Analysts at Nomura offered their views on the US economy.

Key Quotes:

"We expect continued growth, with upside risks in the near-term.

Activity: In the wake of the election, we expect the Republican-led Congress and the Trump administration to support a large fiscal stimulus. That stimulus is likely to include sizable tax cuts for businesses and individuals that will likely be passed sometime in late summer/early fall. We also expect slightly higher federal spending on defense and infrastructure. In contrast, two sets of less conventional policies – trade reform and stricter immigration policy – have the potential to restrict growth. The first will likely place increased restrictions on trade, lifting import prices (feeding higher inflation) which could incite retaliatory actions by other countries (hurting exporters). 

The second set will restrict the inflow of new immigrants and increase the outflow of existing immigrants. This could have a notable effect on labor force growth, causing a notable deceleration in total economic growth. At this point, great uncertainty clouds the outlook for policy, but our preliminary assessment suggests that proposed tax cuts and federal spending should boost growth in late 2017 and into 2018 before the negative effects of restrictive trade and immigration policy start to take over and reduce growth in late 2018 and beyond.

Inflation: With oil prices trending higher since Q1 2016 we expect inflation to move higher this year.  We expect core CPI inflation to remain around 2%, while core PCE inflation should trend gradually higher. With steadily increasing pressure induced by fiscal and trade policy, we believe core inflation will grow somewhat faster in 2018 than we previously expected. 

Policy: After years of the Federal Reserve being “the only game in town,” fiscal support is coming. The Fed will likely be more aggressive in response to major fiscal stimulus as the economy is close to full employment. We forecast the Fed to conduct three interest rate hikes in 2017 and two in 2018. 

Risks: There remains significant uncertainty surrounding our forecast as there is little concrete information on which fiscal policies will be enacted. It could take many months for that uncertainty to clear. Also, geopolitical uncertainty, slower global growth, the strong dollar, and tight financial conditions remain key risks to our outlook."