Upsides Likely to Outweigh Downsides in 2017

The first weeks of 2017 have been good for the economy. Will this bright outlook last?

What a difference a year makes. The backdrop in these first several weeks of 2017 looks brighter than the same time last year. Right now, we see the start of an expected cadence of interest rate hikes, a post-election stock market rally that’s still going strong and slightly lower gold and energy prices.

Will this bright outlook last? PNC Chief Economist Stuart Hoffman and Chief Investment Strategist Bill Stone share their thoughts.

Upside, But Questions Remain

Acknowledging the uncertainties that come from a new presidential administration, Hoffman identified the upside potentials and downside risks of PNC’s economic outlook. His team forecasts real GDP growth of 2.4 percent this year and 2.7 percent in 2018. That’s because the U.S. economy is in solid shape, and fiscal policy should stimulate growth.

The upsides, as Hoffman sees them:

  • Expected tax cuts for individuals and businesses. “It will take time for these policies to be enacted, but by later this year, we should see a noticeable boost to the economy,” he said.
  • More federal spending on infrastructure and defense. Most may start late this year and into next year, Hoffman added.
  • Deregulation of key industries. Reduced laws in the energy production and financial services industries, for example, could bolster the economy.
  • Favorable economic conditions. Job growth is strong, unemployment is down, the housing market should see gains and auto sales are poised for another record year. “As a result, consumer spending will continue to lead economic growth in 2017,” he said.

Downside risks to economic growth, however, are bigger than last year:

  • Trade disputes. These could threaten the global economy and weigh on U.S. exports. “I think there will be trade skirmishes, but hopefully not an all-out trade war with China,” Hoffman said.
  • A stronger dollar. “The stronger dollar will encourage imports and discourage exports, leading to a larger trade deficit that will weigh on growth,” he said.

“Even with these drags, it’s still a net positive for economic growth with faster inflation,” Hoffman noted. “That’s why we increased our forecast.”

Given the good economic story, PNC economists believe the Fed will raise short-term interest rates twice this year. “We think we’ll see rate increases pretty regularly, starting the middle of this year through the end of 2018, totaling 1.5 percentage points,” he said.

Stocks Should Benefit From Economic Growth

A bright economic picture bodes well for the stock market.

“If we receive the corporate tax cuts we expect, earnings growth for the S&P 500 should benefit,” Stone noted. “An upside to earnings could drive stock prices. We could see stocks hit mid-single-digit price gains, with attractive dividends on top of that.”

Stone’s investment strategy team is optimistic that stocks can continue to outperform bonds and cash for 2017. But history has occasionally shown declines during the first quarter of a new presidency, as the uncertainty surrounding a new administration collides with post-election optimism.

Although the stock market has rallied since the election, uncertainty in the U.S. and across the globe likely will lead to market swings during the year.

“Global politics could affect market volatility,” Stone said. “Brexit hasn’t officially begun yet. And a number of elections could impact markets if other countries become more likely to exit the European Union. In particular, Italy’s actions could be key.”

View the full analysis from PNC»

Stuart hoffman
Stuart Hoffman expects economic growth and faster inflation, despite downside risks
Bill Stone
Bill Stone cautions that investors could see volatility in the markets in 2017