The Wells Fargo Securities Economics Group recently published its 2017 Annual Economic Outlook (PDF). We asked John Silvia, chief economist for Wells Fargo Securities, to discuss some of the topics covered in the report.
Q: What are the positive factors working to support economic growth in 2017?
Silvia: Steady consumer spending and government expenditures support the outlook for growth. These two sectors account for over 70 percent of U.S. economic activity. Meanwhile, the recovery in energy prices should boost capital equipment spending and structures expenditures, providing a more balanced composition of growth than we saw in 2016.
Q: On the downside, what could limit growth next year?
Silvia: Trade will likely be a drag on growth amid steady domestic demand, somewhat sluggish growth abroad, and a strong dollar. In addition, trade could be a greater worry given the weakness in Mexico’s peso (one of the U.S.’s top three trading partners), as well as concerns about political and economic relations with China.
Q: The report analyzes “risk and reward in an aging business cycle.” What does an “aging business cycle” entail?
Silvia: Two characteristics help define the current aging business cycle. First, the length of the current expansion in months (90) of this business cycle is already above the average of the post-World War II period (58.4 months). Second, some important economic indicators — such as profit margins for non-financial corporations, credit quality as measured by noncurrent business loans, and slower factory orders for capital goods — have shown some signs of peaking and signal potential downside risks late in the cycle. Meanwhile, unit labor costs and inflation measures are rising — another typical sign of an aging business cycle.
Q: What role does that play in forecasting next year’s economic outlook?
Silvia: We must be aware that we are beyond the mid-point of the cycle and therefore be very cautious in our outlook. For example, declining profit margins intimate slower capital spending and job gains. The rise in noncurrent business loans means more caution in credit growth. Finally, rising unit labor costs and inflation signal a rising interest-rate environment.