Thinking About 2018 GDP

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An interesting report was released by Goldman Sachs this week titled “As Good as It Gets.”  The article shares Goldman’s 2018 GDP outlook, globally as well as for the US.

Given that many are finalizing their 2018 forecasts, thought is may be helpful on what leading analysts are thinking.  This is not an endorsement, just sharing some observations.  The following are comments relating to the US market with nominal regarding the overall macro environment.  It should also be noted that US construction and industrial output will change by market.  DISC as well as Electrical Wholesaling (Market Planning Guide) are very good tools for distributors and manufacturers to use for industry specific and market specific insights.

So, from Goldman Sachs’ viewpoint:

  • Our global GDP forecast for 2018 is 4.0%, up from 3.7% in 2017 and meaningfully above consensus. The strength in global growth is broad-based across most advanced and emerging
    economies.
  • On the supply side, we have also seen tentative signs of a rebound in productivity growth from its dismal post-crisis trend. Nevertheless, spare capacity is diminishing rapidly—and already exhausted in a number of advanced economies, including the US. There, the question is no longer whether output will overshoot potential, but by how much.
  • Expect a gradual increase in global core inflation, albeit to levels that are still below central bank targets in most places. (And we’ve seen from manufacturer Q3 reports that price increases are coming to the electrical industry.)
  • Our Fed call is considerably more hawkish than market pricing,
  • The US tax reform debate has moved quickly in recent weeks and we believe the probability of an agreement by early 2018—most likely in January—has risen to around 80%. The outlook in the Senate is not yet clear, but the signs in that chamber are more positive than they have been in several months. The effects of tax reform on the economy should, however, be fairly modest. As shown in Exhibit 5, we estimate that fiscal policy changes over the coming year will boost US growth by about 0.4pp in 2018 and 2019, with roughly half of the impulse coming from tax reform.
  • Strong growth continues and expect above-trend growth in the US (at 2.5% in 2018) which is up from a Bloomberg consensus of 2.2% for 2017 and 1.5% in 2016.  2019 early forecast is 1.9%.
  • The aggregate unemployment rate across advanced economies has fallen almost back to pre-crisis
    levels. As a result, our output gap estimates  suggest that most advanced economies are now near full employment. We find that the US … has already slightly moved past full capacity.
  • The “Philips curve” model says that weak trend productivity growth is keeping wage growth below the pre-crisis norm across all economies in our sample. This is important because it is unit labor costs—wage growth adjusted for productivity gains—that matter for price inflation. Our results therefore point to building price pressures in a number of advanced economies, including the US.
  • Our Fed call is considerably more hawkish than market pricing, with a hike in December (subjective probability 85%) and a baseline forecast of 3¼-3½% by late 2019. By contrast, short-term interest rate futures for late 2019 imply just 2%, even after the recent bond market selloff.

While some of this may seem technical, and maybe too macro, takeaways should be:

  • Look for US GDP growth to be 2.5%
  • Expect increasing inflation, although low based upon historical inflation
  • Expect price increases from suppliers (which also fuels inflation)
  • Expect Fed rate increases, but still nominal
  • Expect continued employment challenges, and perhaps rate increases, due to full employment.  Companies will need to continue to focus on productivity improvement in lieu of adding operational staff.

And these are some of the macros that are supporting industry projections of 3 1/2-4 1/2% from one source, 4-6% from Electrical Wholesaling and we’ve also heard as low as 2% to 6%.  All of these projections are national.

Bottom line … 2018 should be a growth year, albeit not a blockbuster.  Focus on taking share, vertical market opportunities, target account marketing, price optimization, being operationally lean and metric management

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