PNC’s 2017 Outlook

Given the big surprises of 2016 in regards to the Brexit vote to exit the European Union (EU) and the U.S. presidential election, we are especially attuned to the potential impact of events ahead on the global landscape as we head into 2017. The U.K. is still attempting to figure out how to successfully exit the EU and all that it entails to do so. While, the U.S. has a new first-term Republican President and a Republican-majority Congress, marking the first time since 2006 that the Republicans control both the administrative and legislative branches of the federal government. Even in the face of the unexpected outcomes of unforeseen events, we have seen significant progress since the depths of the Great Recession, and the U.S. markets have recently reached all-time highs.


Uncertainty Ahead?

We are keeping a close eye on the impact of potential global events on the horizon for 2017. In addition, questions raised by the U.S. political landscape and other events ahead could influence the economic outlook, including:

  • Fed moves to raise rates again in 2017, as well as bond yields and inflation expectations
  • unease in the global political arena, including the potential rise of populism
  • the state of the energy sector, and, specifically, oil prices
  • economic cycle situation and growth forecasts

Measured Approach to Rate Increases

As PNC expected, the Federal Reserve (Fed) raised rates in December 2016, the first increase since 2015 and only the second increase in the fed funds rate since lowering the target rate range to 0-0.25% in December 2008. The Fed has been cautious in its strategy of increasing rates and we expect its approach of gradual increases to continue in 2017. PNC’s forecast is for three moderate rate hikes in 2017. Before elections, bond yields were already trending higher due to rising inflation expectation and term premiums. We believe that yields will stay at their higher levels in the near term. The yield curve has also steepened and may steepen even more, as the driver for short-term rates are influenced by Fed fund moves, while economic growth and the inflation outlook are influencing longer-term rates.

Assessing the Economic Outlook

In our view, looking at multiple factors helps us to obtain a more accurate view of how robust the economic recovery is. We typically look at three primary indicators to assess the state of the economic recovery: housing, consumer spending and jobs.

The Housing Market Shows Positive Signs for 2017

Housing is particularly significant, given its role in the Great Recession. In addition, its recovery has been lukewarm, with fits of upward momentum interspersed with stalled growth. There are some positive signs for 2017, and current price appreciation is higher than the post-recession average.

Some of the reasons for this improvement could be:

  • growing interest from millennial and other first time homebuyers in purchasing homes, and
  • improved labor market and strong equity markets facilitating the propensity for purchasing

PNC’s forecast is for continued growth in housing sales in 2017, somewhat dependent on the direction and magnitude of mortgage rate movements. These positive factors could be partially offset by rising home prices, high student loan debt levels and lackluster income growth.

Consumer Spending a Strong Economic Driver

Consumer spending in 2016 was supported by robust job growth, a tightening labor market, low borrowing rates and stable home and equity value. We believe that relatively low debt ratios and solid gains in net worth will sustain consumer spending in 2017.

Labor Markets Marching Towards Full Employment

From the 10% unemployment rate during the depths of the recession, unemployment has steadily improved to reach a sub 5% level in 2016. In our opinion, the labor market has reached a point of stability and will continue to progress toward full employment in 2017. We do recognize that some of the underlying data may point toward a weaker unemployment picture than appears on the surface.

  • A large portion of the improvement can be attributed to a decline in the labor force participation rate, which is at close to a 40-year low.
  • A potentially high level of either underemployed workers, working either part-time or below their skill set.

Oil Scenario Remains Muted

From the lows of the very beginning of 2016, when crude fell below $30/barrel, oil prices have rebounded slightly. However, prices remain far below 2014 prices. We anticipate that this will be more or less the status quo for 2017, with prices remaining depressed but not to the level experienced in the 2015 to 2016 period.

Positive Outlook for 2017

Based on these factors, we expect growth in 2017 to accelerate to 2.3% this year. This is likely to be aided by expansionary fiscal policy from President Trump and the Republican Congress, which is likely to enact cuts in personal and corporate tax rates, increase federal infrastructure and defense spending and reduce regulations in areas such as health care and environmental controls. We remind investors that we believe in a focus on investing for the long term, based on one’s unique goals, situation, risk preferences and other factors.

 

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Important Legal Disclosures and Information

The material presented in this article is of a general nature and does not constitute the provision by PNC of investment, legal, tax, or accounting advice to any person, or a recommendation to buy or sell any security or adopt any investment strategy. Opinions expressed herein are subject to change without notice. The information was obtained from sources deemed reliable. Such information is not guaranteed as to its accuracy. You should seek the advice of an investment professional to tailor a financial plan to your particular needs. For more information, please contact PNC at 1-888-762-6226.


The material presented in this article is of a general nature and does not constitute the provision by PNC of investment, legal, tax, or accounting advice to any person, or a recommendation to buy or sell any security or adopt any investment strategy. Opinions expressed herein are subject to change without notice. The information was obtained from sources deemed reliable. Such information is not guaranteed as to its accuracy. You should seek the advice of an investment professional to tailor a financial plan to your particular needs. For more information, please contact PNC at 1-888-762-6226.

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