Two reasons the US economy should fare better in 2017

Rick Rieder |20-Jan-2017

Rick Rieder, BlackRock’s Chief Investment Officer of Global Fixed Income, explains why there's a good chance US growth will
pick up from 2016.

I see two key shifts helping to propel growth higher, albeit within the context of broad structural trends keeping growth rates lower than in prior economic cycles. Changes to the US demographic profile and rapid technological change cannot be altered meaningfully, and are likely to hold down growth. Still, within a range of ‘what is possible’, there are reasons to be optimistic about the US economy in 2017.

Improving confidence

Since the November election, both consumer and chief executive officer confidence levels have improved remarkably amid expectations of more fiscal stimulus. This should translate into greater spending, and economic growth, in the year ahead. Indeed, the Conference Board’s index of consumer confidence expectations index is a very strong leading indicator of real year-over-year Personal Consumption Expenditures (PCE), as the chart below shows. Expenditures noted on the PCE drive roughly 70% of US gross domestic product (GDP), according to our research.

The US industrial recession is ending

Market performance bears out the idea that there was a persistent industrial recession in the US over the last few years, amid a broader regime defined by central bank accommodation, low growth and low inflation. However, goods-producing sectors now appear to be emerging from this long-term recession into positive growth territory.

Since last September, we have begun seeing signs of life in the US manufacturing, industrial production and trade sectors, as major central banks have shifted policies to let economies and inflation run hotter. And since the November US election, these signs of life have only strengthened. For instance, the fourth quarter of 2016 saw considerably stronger hiring in the goods-producing sectors than the remainder of last year.

We believe this manufacturing recovery, alongside consistently solid service sector growth, will be a key driver of stronger US, and global, growth in the year ahead

Leading indicators imply industrial sector growth should continue over the course of 2017, with the potential implementation of lower taxes, increased fiscal spending and resulting stronger goods consumption. We believe this manufacturing recovery, alongside consistently solid service sector growth, will be a key driver of stronger US, and global, growth in the year ahead.

Global Investment Outlook: Our views on 2017

Resulting labour market strength in 2017 should help the US unemployment rate march towards the low-4% region by year-end and put upward pressure on wages. Organic wage growth, alongside the implementation of minimum wage hikes, will likely only further reflate the US, providing an economic backdrop that justifies the Federal Reserve (Fed) increasing rates at least two times in 2017.

Data over the coming months may certainly press the Fed to move rates higher at a quicker pace going forward, meaning moderately more aggressive tightening that could potentially outweigh fiscal stimulus efforts. In the end, we greatly hope policymakers can take a balanced approach between growing fiscal and receding monetary policy stimulus in the year ahead, allowing interest rates to slowly normalise at the same time that growth and inflation move to healthier, higher levels.

Finally, there are still abundant risks around the world that could derail global growth and markets, dampening the US outlook. A spike higher in the US dollar could present a very significant challenge to China and many emerging markets, for example. Further, there are plenty of political risk events coming in 2017 in Europe, to say nothing of unforeseen events. Still, for now, we see better US growth prospects ahead.

Rick Rieder
Chief Investment Officer of Global Fixed Income
Learn more

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or financial product or to adopt any investment strategy. The opinions expressed are as of January 2017 and may change as subsequent conditions vary.

CARS ref: UKRSM-0328