Factoring in US growth expectations

In the US, economic growth rebounded in the third quarter however the sources of this growth, inventories and exports, appear transitory. GDP grew at 2.9% annualized in the third  quarter of 2016, following sub-2% growth the three previous quarters. Weakness in inventory accumulation and export growth had been a major drag on growth before the third quarter. A jump in both series this quarter may reflect a rebalancing effect rather than a sustainable change in GDP trend growth. Nevertheless, we revised up our US GDP forecast over the next year to 1.9% from 1.7% which is below many commercial forecasters. We currently assign a probability of about 61% of below 2% growth, a 39% probability of 2-4% growth and essentially zero weight on above 4% growth.

At the November Federal Open Market Committee (FOMC) meeting, the US Federal Reserve decided not to raise its target federal funds rate. In its press release the FOMC stated that “some evidence” was already apparent towards its objectives implying that some current data already points to a rate rise. Also the revised dot chart forecasts one rate rise in 2016 and at least two in 2017. We believe the FOMC came close to “broadcasting” a strong desire to increase rates in December 2016. We thus maintain our forecast of a rate hike at the December meeting.

Karsten Jeske – Mellon Capital, a BNY Mellon company


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