Who would dare to make economic predictions for 2018 in the age of Trump? We can try, with the help of economists and other experts in the financial field. Here are our predictions for five major economic metrics in 2018.
1. Economic Growth – Current predictions for 2018 US economic growth are around 2.5%. The International Money Fund (IMF) revised US growth estimates down to 2.1%, citing higher borrowing costs among other factors. This is well below the IMF's projected 2018 worldwide growth rate of 3.7%.
None of these predictions will please President Trump, especially if the IMF is correct and world growth significantly outpaces the US. Trump expects a 3% to 4% growth rate to occur in the US. We don't. The 2.5% economic growth prediction seems more likely.
2. Interest Rates – Federal Reserve rate hike predictions were rampant in 2015 and 2016, but each year yielded only a single 0.25% hike in December. In contrast, three 0.25% hikes occurred in 2017, raising the Federal Funds rate to a range of 1.25%-1.5%.
Economists generally expect this trend to continue in 2018 as the economy strengthens and the Fed attempts to normalize rates. A common prediction is for three more 0.25% increments to reach 2-2.25% by the end of 2018.
3. Stocks – How can stocks top the growth of 2017, with broad market growth of over 15% for the year? It probably can't, given interest rate hikes and high expectations for corporate profits. Economists are split – some see stocks with continued growth at a lower rate, others see the end of the eight-year bull market. A Bloomberg survey takes a more pessimistic view, expecting a 20% decline.
A lot will depend on the final form of the pending tax legislation (if it passes at all). Failure to pass the expected business-friendly tax plan is likely to undercut any growth trends in equities, since the plan's optimistic effects have already been priced into the market.
We expect some watered-down tax plan to pass and stocks to continue growing in 2018, but at a slower rate. Watch the end of the year for election-year-induced swings.
4. Oil/Gas Prices – The US Energy Information Administration (USEIA) projects oil prices and gas prices to stay relatively stable or raise slightly, with crude oil in the $51 range (West Texas Intermediate) and gas prices around $2.45 nationally. Supply is still plentiful – OPEC is attempting to lower production to drive up prices but growth in US production should mediate the effect.
Barring an international conflict or natural disaster (and what's the odds on those happening?), gas prices should stay relatively stable.
5. Inflation – Inflation is expected to grow slightly to reach 2.1% in 2018, staying near the Federal Reserve's target value of 2%. According to Kiplinger, rising housing and medical costs are expected to account for the majority of the increase. We see no reason to disagree.
How should you react to these predictions? The same way you normally would – by keeping a reasonably diversified portfolio that protects against market uncertainties, maintaining a budget that keeps your spending under control, and setting aside appropriate savings for your retirement along with an emergency fund.
Follow that philosophy and you should be able to thrive regardless of whether economists are spot on or completely wrong. In the age of Trump, anything is possible, and that's how you should prepare.
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