An Uncertain Outlook, but for Whom?

The outlook for 2017 is now shaping up as a battle of ideas, though few seem to be realizing it yet. The stock market has risen since the election. Consumers, small businesses owners, homebuilders, and manufacturers are all more optimistic. Many expect that a rollback in regulation, increased infrastructure spending, and lower taxes will spur growth. Yet, most economists, including those at the Fed, have raised their GDP forecasts for 2017 and 2018 only slightly at best. At the center of the discussion are differing views of how much stimulus we may get, how much slack remains in the labor market, and whether increased optimism can be self-fulfilling.

In the Fed’s revised Summary of Economic Projections, the median forecast for 2017 edged slightly higher, to 2.1% (from 2.0%), while the median forecast for 2018 GDP growth remained at 2.0%. In her post-FOMC press conference, Fed Chair Janet Yellen emphasized that the economic outlook is “highly uncertain.” Some, but not all, of the Fed governors and district bank presidents adjusted their forecasts for possible changes in fiscal policy (government spending and taxation) and other policies (deregulation) that might affect growth. Surveys of private-sector economists also showed only a mild increase in GDP growth expectations since the election.

Changes to the regulatory outlook are often difficult to gauge as a new administration takes charge. Laws may remain on the books, but they may be ignored. Just about everybody agrees that the country needs infrastructure investment, but it will likely be difficult to achieve through deficit spending. The House of Representatives no longer has earmarks (specific allocations in spending bills). Without the ability to do any “horse trading” for votes, it will be hard to reach a broad spending agreement. Funding infrastructure through the private sector would mean privatization. That may make some sense for airports, ports, or major bridges, but most Americans would bristle at the thought of having to pay simply to drive down the road. Privatization would also be unlikely to funnel infrastructure investment to where it is most needed.

Tax cuts should be easily achievable. It’s what Republicans do. However, it’s unclear how much of a reduction we’ll see. Reducing deductions could offset the impact of lower rates, but nobody is going to want to give up their current tax breaks.