Outlook 2017: Economy Approaching Mid-Cycle Acceleration


  • Economic momentum, fiscal policy likely to be enacted by mid-2017, and a more business-friendly regulatory environment may help real GDP growth accelerate to a range closer to 2.5% in 2017.
  • Faster growth would likely include a shift in growth drivers from an emphasis on the consumer to a mix that includes manufacturing, capital expenditures, and government spending.
  • If we meet the Fed’s forecasts for the economy, labor market, and inflation in 2017, the Fed is likely to raise rates twice during the year, with three times more likely than one.

In 2016, the U.S. economy navigated some difficult challenges including low oil prices, a strong dollar, tightening financial conditions, and the threat of deflation. As we turn the calendar to 2017, concerns have shifted. Oil prices have stabilized; while the dollar, despite receiving a post-election boost, is unlikely to create the kinds of headwinds it created over the last three years. Increased anxiety over deflation in 2015 and early 2016 has flipped to “reflation” concerns. Conversations about fiscal austerity, through mechanisms like budget sequestration that left the economy relying on monetary stimulus through the Federal Reserve (Fed), have turned to a drum beat for fiscal stimulus through tax reform and infrastructure spending while the Fed slowly normalizes monetary policy. We have even started to see steadying in the manufacturing sector, following contraction under the influence of low oil prices, a strong dollar, and weaker global growth. Although the economy remains more fragile than during most prior expansions, these turning points have marked the economy’s ability to navigate a challenging period.


Taking into account all of these milestones, we believe the economic recovery that began in mid-2009 will likely pass its eighth birthday in 2017, as leading economic indicators continue to suggest low odds of a recession starting next year. However, the risk of a recession due to a policy mistake has risen over the course of 2016. The pro-growth policies likely to be enacted in the first half of 2017 by Trump, including corporate and personal tax cuts, increased spending on infrastructure and defense, and deregulation, may help to boost economic growth in 2017 and 2018 and increase the economy’s potential growth rate (while changing the mix of growth drivers). However, they may also lead to some of the “overs” that tend to emerge at the end of expansions (overconfidence, overborrowing, overspending), naturally accelerating the economic cycle and bringing a recession sooner than otherwise might have been the case.

Focusing on 2017, between the economic momentum that started in late 2016, the boost from fiscal policy likely to be enacted by mid-2017, and a more business-friendly regulatory environment, real gross domestic product (GDP) growth may accelerate to a range closer to 2.5% in 2017, after spending most of the first seven-plus years of the expansion averaging just over 2.1%. The boost in 2017 comes as the main drivers of growth shift from an emphasis on the consumer to a mix that includes manufacturing, capital expenditures, and government spending [Figure 1]. Potential contribution from trade (net exports) remains a wild card, as the Trump administration’s trade policies, while attempting to shift the balance of exports and imports, may have a dampening impact on long-term trade growth. In addition, the deficit could make a comeback as a key economic topic for markets and policymakers in the aftermath of a potential shift to fiscal stimulus through lower taxes and increased infrastructure and military spending.

Of course, new risks could be around the corner. The Fed may start raising rates in earnest, if slowly, after a one-year hiatus between December 2015 and December 2016. Raising rates at this stage would simply reflect an improving economy, but finding the proper pace for rate increases will be a challenge. President-elect Donald Trump has expressed intentions to renegotiate trade agreements, but will face the challenge of improving them without starting a harmful trade war. And although fiscal stimulus may give a boost to growth, long-term challenges for the federal debt and budget deficit loom in the background.