The US economy: Strengths and hazards
15 February 2017 | Markets and Economy
In 2016, the United States economy finally seemed to emerge from the post-financial crisis doldrums. Will growth continue in 2017?
For an in-depth look at Vanguard's global outlook for 2017 and beyond – including our forecast for the United Kingdom and Europe – read our full report, Stabilisation, not stagnation.
Gemma Wright-Casparius (senior portfolio manager, Vanguard Fixed Income Group): What forces are expected to help the US economy strengthen in 2017, Roger?
Roger Aliaga-Díaz, PhD (Vanguard chief economist, Americas): Just to keep it in perspective, the US economy – even before the election – was in good shape. It was at full employment. The unemployment rate has come down to pre-recession levels. We have seen healthy levels of job growth. The consumer sector has been really strong, even over the last two years. And the government fiscally, the fiscal side that had been kind of a drag for a couple of years, has gone into neutral. We have seen government spending starting to normalise.
But on top of that baseline that gives us our trend [GDP] growth of 2%, we had to consider the potential for fiscal stimulus and for some of the fiscal policies that are being debated.
Now we need to know the details, but if we were to get some tax cuts, some pro-business tax reform, regulatory reform, and even some infrastructure spending, that could at least boost the business capital spending side of the economy, which has been kind of a weak spot for the last couple of years. So that could be an upside risk factor that could get us into a 2.5% or a slightly higher growth for 2017 potentially.
Gemma Wright-Casparius: And since we always like to look at both sides of the equation, what could be the downside?
Andrew Patterson, CFA (Vanguard senior investment strategist): I think China is a big factor we're keeping an eye on – our relationship with China, our trade with China. Related to that, protectionist policies more generally. We've seen a move away – not only here in the US but globally – a movement towards less free trade. And there's good reason for that.
Free trade from an economic perspective doesn't lift all boats equally. There are going to be some winners and some losers when you do have a global economy such as ours. And we've seen a bit of backlash for that. We've seen that play itself out in the UK referendum on Brexit. We've seen it play out in the US election. So more on that to come, and we have to keep an eye on how those policies evolve.
And I think policy uncertainty more broadly is a concern that we have, not the least of which is around monetary policy. Monetary policy has been carrying the load here in the United States, and globally for the entirety of the global financial crisis and the recovery from the global financial crisis.
So at this point, we're now entering an era where you could see some support from fiscal policy. Does that play out the way the policymakers intend? We have to wait and see, so we're keeping a very, very close eye on it going forward.
Gemma Wright-Casparius: Peter, we get this level of uncertainty in the United States; we have the level of uncertainty in Europe with respect to the Brexit and some potential anti-EU backlash, and the markets tend to be more volatile in periods of greater uncertainty, either fiscal or monetary. How should investors incorporate that into their thinking with respect to their portfolios? So we have a standard 60/40 balanced portfolio for an investor. Over the next one to three years, how should they think about potentially higher interest rates and higher equity prices?
Peter Westaway, PhD (Vanguard chief economist, Europe): I think that's a really important question, and over the last year, we've had lots of conversations with clients who've been asking us, 'How should we position ourselves in advance of the Brexit vote, in advance of the US election?' And all the time we've been saying, the important thing is to keep a focus on your long-term goals, not to try and do anything radical with your portfolio. And in the event, what we've actually found is that those people have been served very well by keeping that globally diversified, simple portfolio, which over the long run will serve them very well.
Andrew Patterson: If your investment horizon [and] your goals haven't changed markedly, we don't believe there's cause for a significant change in your strategic asset allocation. The strategic association is for the long term. And before the Brexit vote, if you were in a 60/40 portfolio, we believe after the Brexit vote a 60/40 portfolio will remain appropriate for you.
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