Congressional Budget Office Long-Term Economic Forecast

On Monday, the Congressional Budget Office (CBO) provided its updated forecast for U.S. economic growth for this year and beyond. It also warned for increasing uncertainty from U.S. plans to widen tariffs, stating: “Recently implemented changes to trade policies, and proposals calling for further changes, compound the uncertainty surrounding the current economic outlook.”

The U.S. economy is projected to expand 3.1 percent this year, down from a previous forecast in April of 3.3 percent. The expansion is expected to ease to 2.4 percent in 2019, unchanged from April’s projection on slowing growth in business investment and government purchases.

The CBO report reads: “Despite the volatility in the rate of GDP growth in the first and second quarters of the year, CBO expects the momentum underlying that growth to largely continue into the second half of the year before slowing gradually in subsequent years. CBO estimates that real GDP will grow by a total of 3.1 percent in 2018 (up from 2.5 percent in 2017) and by 2.4 percent in 2019. Growth of real GDP is expected to slow further after 2019, averaging 1.6 percent per year between 2020 and 2022.”

In its last long-term economic outlook in April, the CBO said the U.S. budget deficit is on track to top $1 trillion by 2020, from $804 billion this fiscal year and $981 billion the next. The Trump administration’s tax cuts and roughly $300 billion in spending increases are deepening the budget deficit. The gap widened by more than 20 percent to $684 billion in the first 10 months of the fiscal year, as revenue from corporate receipts dropped.

The CBO has further revised downward its forecast of interest rates over much of the projection period on the basis of information about financial markets and the projections of other forecasters. It has also revised slightly upward its near-term inflation forecast on the basis of recent data on consumer prices.

I think that long-term investors could do well taking a brief look at the CBO report.

Outlook for the Fed’s Interest Rates

Despite fears of Turkish contagion, odds of a Fed hike in September have remained unchanged from a week ago at 90 percent, according to pricing in federal funds futures, with the probability of another move up in December seen at roughly 55 percent.

I wouldn’t count on Fed Chair Powell for refraining from raising rates in September as well as in December because of the Turkish turmoil that has also seriously impacted the wider emerging-market selloff.

From recent history we have learned that the U.S. can generally ignore what happens in emerging markets, unless it involves China.

Of course, Fed officials will “be concerned, they’ll be worried, and they’ll be monitoring, but they’re not going to take any action on U.S. monetary policy until they expect the Turkish crisis to spill over in some substantive way into the U.S. If you look at how Turkey is affecting U.S. financial conditions, for the time being at least, you can hardly see it.

Speaking on August 4, New York Fed Executive Vice President Simon Potter told an audience in Manila: “Maintaining the U.S. economy on a sustainable trajectory, including through transparent monetary policy implementation and effective and efficient regulation, is our best means of contributing to prosperity both at home and in the broader global community.”

Euro area GDP in Q2

The Euro Area economy grew 2.2 percent year-on-year in the second quarter, above a preliminary reading of 2.1 percent and following a 2.5 percent expansion in the previous period.

The second estimate still lacks any details on the GDP expenditure components, but it does provide some information on the performances of individual members. The headline revision was essentially attributable to Germany where quarterly growth weighed in at an unexpectedly strong 0.5 percent. This outpaced the sluggish 0.2 percent rate posted by both France and Italy and was only just short of Spain, where growth dipped a tick to 0.6 percent.

The slightly better quarterly better GDP (revised) must be welcomed by the ECB but even after the revision, quarterly growth was still no better than the supposed temporary slowdown at the start of the year.

Moreover, there must still be concerns about the weakness of France and Italy.

Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.