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Policymakers Expect US GDP to Grow Moderately

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Economic growth—June 2016 minutes

Most FOMC (Federal Open Market Committee) participants expect real GDP to pick up the pace in 2017—compared to 2016. In 2018, they expect the pace to be above their longer-run projections. A reduction in drag from net exports, more improvements in consumer and business balance sheets, benign financial conditions due to an accommodative monetary policy, and improved support from fiscal policy are the primary reasons that make them feel that US GDP will grow at a moderate pace over the next few years.

The median of the rate of estimated economic growth for 2016 fell to 2.0% from 2.2%. For 2017, it also fell to 2.0% from 2.1%—compared to projections made in March 2016. The following graph, taken from the June 2016 minutes, shows economic growth expectations for 2016 and 2017.

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Changes in expectations

The downward movement of the median compared to March can primarily be attributed to weaker-than-expected economic growth in 1Q16. It’s also due to weak readings on business spending.

Investor takeaway

Consumer spending is the key to whether economic growth can give policymakers enough confidence to increase rates in 2016. This is especially so as nonresidential fixed investment and net exports remain soft. Consumers’ willingness to spend will show that the US economy is strong domestically. It might give policymakers enough confidence to hike rates at least once in 2016 even if external conditions remain uncertain.

The Consumer Staples Select Sector SPDR ETF (XLP) and the Consumer Discretionary Select Sector SPDR ETF (XLY) have posted gains for the year—XLP outperformed XLY. Not only economic growth, but also the fate of companies like Philip Morris International (PM), Costco (COST), and Mondelez International (MDLZ) depends on how much consumers are willing to spend.

If consumers remain upbeat, then large-cap mutual funds like the Harbor Capital Appreciation Fund – Investor Class (HCAIX) and the T. Rowe Price Blue Chip Growth Fund (TRBCX) stand to gain given their high exposure to consumer discretionary stocks.

Inflation is another aspect that’s watched closely. We’ll discuss this more in the next part.

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