From JP Morgan today on the US cycle:
The prospects for the economy at the end of 2017 look about as favorable as they have at any point in this expansion. The animal spirits of both consumers and businesses appear energized; the ever-present global headwinds of the last half decade have turned to a tailwind; and the domestic fiscal austerity that has acted as a drag on growth since 2011 may now be turning to profligacy. All these factors augur above-trend growth in 2018. The only sticking point is that by many measures the economy already appears to be operating at capacity. This is the fundamental tension in the outlook: does continued above-trend growth tighten labor and product markets enough to threaten higher wage and price inflation or does growth slow enough to limit strains on the rate of resource utilization? Our outlook balances these outcomes. We see growth close to 2% in 2018; while that is somewhat below what we expect will be realized for 2017, it is still about 0.5%-point above our estimate of sustainable, trend growth. This should be enough to push the unemployment rate down into the high 3’s (Figure 1).
Inflation has been mysteriously absent this year, but historically it has not been long before unemployment below 4% began to generate firmer wage and price pressures. We expect that to be the case next year as well. Fortunately for the outlook, this will take place from a starting point in which cost pressures are relatively low, so some firming in inflation trends is not to be feared. Even with core PCE moving only slowly back toward the Fed’s 2% goal (Figure 2), we expect the FOMC will maintain a fairly steady cadence of rate hikes next year. At the beginning of 2017 the Committee’s interest rate forecast “dots” foresaw three hikes this year, and it appears that they will match that forecast. For 2018 the latest dots are looking for another three hikes; this, again, looks like a reasonable forecast to us, though we think the ongoing surprising decline in the unemployment rate means that four hikes next year now look more likely than three.
