Economic Outlook

Average Annual Returns for Different Portfolio Allocations chart

Source: FRED, 6/30/2018.

We expect the pace of economic growth to average about 3% in 2018. Solid job growth combined with individual tax cuts should continue to power rising consumer spending, which contributes to almost 70% of U.S. economic growth. In addition, higher business confidence has helped bolster business investment, housing construction is increasing, and higher government spending for the next two years all point to somewhat better economic growth for the next year.

More jobs and more workers – The U.S. economy added an average of 215,000 jobs per month in the first half of 2018, surprisingly strong job growth in the 10th year of this expansion. Solid job growth has reduced the unemployment rate to nearly 17-year lows, as the chart shows, and the underemployment rate has also declined sharply. But wages have continued to rise slowly, up an average of 2.7% over the past year, suggesting the labor market may have more flexibility than previously thought and may not become a near-term limit to overall growth.

Tariffs and their impact – The economy’s solid footing gives us confidence it can absorb the impacts of the higher tariffs that have gone into effect over the past few months. Although their effects are uneven and have been significant for some producers and companies, we believe they won’t significantly slow overall growth. But additional tariff increases or a trade war could become much more costly and dampen our outlook.

Inflation still near 2% – Higher prices at the pump, tariff increases and transportation shortages have pushed short-term inflation rates higher, and some companies have started raising prices to cover higher costs. Still-modest wage growth has kept current and expected inflation rates near 2%. While we don’t expect it to accelerate sharply, rising inflation has led to faster rate hikes in the past and remains one of the biggest risks to our outlook.

Action for investors

Modestly faster economic growth and still-low inflation are favorable conditions for both stocks and bonds. Investing in the right mix of equities and fixed income based on your situation, time frame, goals and comfort with risk can help you stay on track through both good and bad economic times.

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