U.S. economic growth has accelerated after a sluggish start to the year, while unemployment has fallen to the lowest point in almost 17 years and the stock market has been climbing to record highs.
President Donald Trump attributes the good news to optimism about his economic program but some economists worry about how long the good times can last.
Diane Swonk, CEO of DS Economics in Chicago and a past president of the National Association for Business Economics, gives her views on the economic outlook.
Q: Do you see the recent acceleration in growth continuing?
A: After GDP grew at a 2.1 per cent rate in the first half of the year, we are looking at somewhere around 2.75 percent growth in the second half. The biggest change we have seen in momentum has been in investment. And people are upbeat about the holiday season.
Q: How is the economy shaping up for next year?
A: Next year looks like it will be a little north of 2 percent GDP growth, not quite as strong as this year.
Q: Does your forecast reflect any impact from Trump’s proposed tax cuts?
A: We are looking at a very small impact. The tax cuts will add quite a bit to overall debt in the U.S. economy, and that will mean higher interest rates down the road, something the markets won’t like.
Q: Do you share the wide expectation that the Federal Reserve will raise interest rates in December for a third time this year?
A: Yes. Markets expect it. I think we are going to see four rate hikes in 2018, which is a little more than the markets expect. The bottom line is that there is a concern about inflation, in asset prices or services, down the road.
Q: Is your Fed forecast influenced at all by the fact that Trump has nominated Fed board member Jerome Powell to replace Janet Yellen as chair in February?
A: No. Our view is that the economy is showing greater strength than it has been exhibiting. That puts the Fed in the position of being concerned about overheating.
Q: Some are worried that the Fed’s extended period of low rates is creating dangerous asset bubbles in such areas as stock prices. Are you worried?
A: It is hard not to worry. We are in period of time where the Fed needs to shift the communications so the market doesn’t feel that low rates are still baked into the cake.
Q: What should investors do in this period of uncertainty?
A: We are starting to get to that point where my hair dresser and the waiter are telling me to buy things in the stock market. I haven’t heard that kind of euphoria since the latter part of the 1990s in the tech bubble. That is when you start worrying that maybe it is time to book the profits you have. My own philosophy is never get too greedy.