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D ECEMBER 2016
I N D E PE N DEN T
RESEARCH | THINKING | RESULTS
Z AC K S I N V E S T M E N T M A N AG E M E N T
O N E S WA C K E R D R I V E , C H I C A G O I L
1-800-245-2934
Z I M W E A LT H . C O M
Page 1
E C O N O M I C O U T LO O K
Relative to our early October base forecast, we lowered our projection of Q4 GDP growth by four-tenths to
1.5%. This reflected downward revisions to our projections for PCE, equipment spending, and the change
in inventory investment. This lowered the near-term momentum in our forecast. Furthermore, over the
next three years, our forecast for GDP growth is 2.1%, 2.0%, and 1.9%, each one-tenth lower than in last
months forecast. This markdown is more than accounted for by increased drag from net exports stemming
from a higher dollar.
Two factors combined to boost the dollar relative to last months forecast. First, the jump-off was higher.
That is, the dollar begins the forecast at a higher level due to some unanticipated strengthening over the
inter-forecast period. Second, our colleagues at Oxford Economics marked down their projections for
several key foreign sovereign yields. And while our US interest-rate forecast is little changed from last
month, the higher path for relative domestic yields raised demand for the US dollar.
With somewhat slower growth in this months forecast, the unemployment rate troughs at 4.3%, one-tenth
higher than in last months forecast. Furthermore, the unemployment rate begins to turn up at the end
of 2019, the leading edge of our baseline assumption of a soft landing from below. With a somewhat
higher path for the unemployment rate and lower import prices (stemming from a higher dollar), core PCE
inflation peaks at 2.0%, one-tenth below the peak in in last months forecast, when core PCE inflation briefly
touched 2.1%.
O N E S WA C K E R D R I V E , C H I C A G O I L
1-800-245-2934
Z I M W E A LT H . C O M
Page 2
Z AC K S I N V E S T M E N T M A N AG E M E N T
O N E S WA C K E R D R I V E , C H I C A G O I L
1-800-245-2934
Z I M W E A LT H . C O M
Page 3
E C O N O M I C O U T LO O K
0.3
-0.4
0.0
-0.4
-0.1
0.0
0.0
-0.1
-0.1
-0.1
1.6
2.1
2.6
2.6
2.9
2.7
2.0
2.7
3.0
2.8
-0.5
-0.3
0.2
-0.2
0.0
0.0
-0.2
0.0
0.1
0.0
2.1
1.8
2.3
2.2
2.4
2.6
2.5
2.4
2.6
2.5
-0.8
-0.3
0.1
-0.1
0.0
0.0
-0.2
0.1
0.1
0.1
1.2
3.8
3.5
3.4
4.0
0.8
0.6
3.7
4.1
4.0
0.5
-0.6
0.3
-0.1
0.0
0.0
0.0
0.1
0.0
0.0
-6.2
2.2
5.0
6.2
7.7
13.1
-1.2
6.2
6.1
5.2
0.1
1.4
0.2
-4.0
-1.4
0.0
0.4
-1.2
0.9
0.2
0.5
0.0
0.7
0.5
0.5
2.2
0.1
0.4
0.3
1.2
0.7
-0.3
0.0
0.2
0.1
0.0
0.1
0.0
0.0
0.0
0.5
0.6
0.0
0.0
0.3
-0.1
-0.1
0.1
0.0
0.0
0.1
-0.2
0.2
-0.2
0.1
0.0
0.0
0.0
0.0
0.0
0.8
-0.9
-0.2
-0.2
-0.6
-0.7
0.0
-0.4
-0.6
-0.8
0.3
0.0
-0.3
0.1
-0.2
0.0
0.1
-0.1
-0.2
-0.2
Note: Positive differences from previous forecast shown in teal, negative differences shown in red.
* Contributions to GDP growth in percentage points.
O N E S WA C K E R D R I V E , C H I C A G O I L
1-800-245-2934
Z I M W E A LT H . C O M
Page 4
Z AC K S I N V E S T M E N T M A N AG E M E N T
Fed Rate Hikes, Widening Term Premia Push Term Yields Higher
Recent developments and FOMC statements suggest that
the Committee is likely to raise the target for the federal
Holding Period Returns on Treasuries
funds rate by a quarter point to a range of % to % at
1-year holding period return through Q4, percent
the upcoming meeting on December 14. Thereafter, the
'15
'16
'17
'18
timing and pace of rate hikes will be influenced by economic
2-year T-Note
0.62
0.91
0.22
1.25
developments. So long as labor markets continue to
Rates view
-0.32
-0.30
-0.88
-0.64
strengthen and, importantly, forecasts for a rise of inflation
Rolldown
0.39
0.37
0.17
0.11
to the Feds 2% target are supported by incoming data, the
Interest income
0.54
0.83
0.93
1.77
Fed is likely to raise the target for the funds rate gradually
10-year T-Note
3.57
5.52
-1.67
-2.05
over the next few years. We anticipate 3 quarter-point rate
Rates view
0.69
2.80
-3.96
-4.72
hikes in 2017 and 3 more in 2018, with the federal funds
Rolldown
0.60
0.53
0.44
0.34
rate expected to rise gradually to 2% within a few years.
Interest income
2.28
2.19
1.85
2.33
30-year T-Bond
3.81
11.75
-6.77
-7.09
'19
2.12
-0.41
0.10
2.42
-0.40
-3.67
0.34
2.93
-3.62
O N E S WA C K E R D R I V E , C H I C A G O I L
1-800-245-2934
Z I M W E A LT H . C O M
Page 5
E C O N O M I C O U T LO O K
O N E S WA C K E R D R I V E , C H I C A G O I L
1-800-245-2934
Z I M W E A LT H . C O M
Page 6
Z AC K S I N V E S T M E N T M A N AG E M E N T
pause. From 1,108 thousand in 2015, housing starts are expected rise to 1,614 thousand by 2019. The
resulting projection for residential investment contributes about percentage point to GDP growth in each
of the coming three years. The broad recovery is expected to reflect continued favorable affordability as
well as pull from solid underlying demographics. In the very near term, single-family housing starts are
expected to ease in October following a pace in September that was above a pace consistent with the
underlying trend in permits. Indeed, we made no specific adjustment to our October starts forecast for
Hurricane Matthew, so we view there to be some downside risk to our October starts assumption. In any
event, single-family starts are expected to continue to firm in the following months.
Mining Investment to Rise & Lead a Broader Investment Recovery
After rising 5.0% over the four quarters of 2014, nonresidential fixed investment slowed to grow only 0.8%
last year and is forecast to grow 0.6% this year. Growth of business fixed investment then picks up in our
forecast to an average annual rate of 3.9% from 2017 through 2019. The contributions to GDP growth
(Q4 over Q4) are one-tenth for this year and five-tenths over each of the next three years. The recent
weakness in part reflects normal accelerator effects stemming from deceleration in business output; slower
growth of output requires slower growth of the capital stock, which implies downward pressure on the
level of business fixed investment. But the recent weakness also reflects slumping fixed investment in oil
drilling structures and oilfield machinery stemming from the collapse of oil prices since mid-2014. Recent
increases in oil prices, however, portend an end to this source of drag. Indeed, rig counts are now rising.
We look for increases in mining activity over the next two quarters to add one-tenth to GDP growth per
quarter.
O N E S WA C K E R D R I V E , C H I C A G O I L
1-800-245-2934
Z I M W E A LT H . C O M
Page 7
E C O N O M I C O U T LO O K
Fiscal Outlook
We assume that: (a) in FY 2018 federal discretionary spending reverts to the sequestration baseline set
under the Budget Control Act of 2011 as later amended; (b) entitlement spending remains on autopilot;
(c) there are no changes to current tax law; (d) fiscal speedbumps, including a possible shutdown of the
federal government in December absent an interim continuing resolution and re-imposition of the debt
ceiling in March 2017, are negotiated without incident; (d) state & local governments maintain balanced
budgets. Under these assumptions, federal, state & local policies on spending and taxation will contribute
roughly 0.5 percentage point to GDP growth from 2016 through 2019. Meanwhile, in August CBO updated
its 10-year Budget and Economic Outlook. The new projections show deficits rising to 4.6%, and debt to
85%, of GDP by 2026. CBOs long-term budget analysis implies that under current policies the debt-GDP
ratio will rise to 141% by 2046, pushing up the 10-year note yield by about 70 basis points relative to a
policy that maintains debt-GDP ratio at its current 77%. It is against this backdrop that the fiscal policy
proposals of President elect Donald trump will be assessed.
2% GDP Growth: TFP Acceleration, Continued Immigration
The LTF was last published on September 19, 2016. However, following completion of this months base
forecast, we extended the simulation through 2025 to produce a LTF update. The first four years of the
LTF update (through 2019) are identical to the current short-term forecast (STF). Beyond the STF, we set
monetary policy to move the economy toward a full-employment growth path consistent with the FOMCs
2% inflation objective. Secular GDP growth is accounted for mainly by growth of the labor force and
of productivity. Census projections assume immigration accounts for up to 40% of projected population
growth without regard to legal limits. Population aging persistently depresses the participation rate, while
a cyclical rebound and increasing life expectancy temporarily offset that impact. In the LTF update, we
assume TFP growth rises towards its historical average of 1%; otherwise secular GDP growth would be
slower and terminal interest rates lower.
O N E S WA C K E R D R I V E , C H I C A G O I L
1-800-245-2934
Z I M W E A LT H . C O M
Page 8
Z AC K S I N V E S T M E N T M A N AG E M E N T
O N E S WA C K E R D R I V E , C H I C A G O I L
1-800-245-2934
Z I M W E A LT H . C O M
Page 9
E C O N O M I C O U T LO O K
O N E S WA C K E R D R I V E , C H I C A G O I L
1-800-245-2934
Z I M W E A LT H . C O M
Page 10
E C O N O M I C O U T LO O K
Moodys downgraded Turkeys outlook to negative following the failed coup in the summer but Standard
& Poors recently upgraded Turkeys outlook to stable noting that despite Turkeys high private sector
external debt the government is enacting the right policies to reduce any external vulnerabilities.
Furthermore, relations between Turkey and the European Union are strained as Europe has not agreed to
visa liberalization for Turkish citizens, while Turkey blames European leaders for not being supportive of
Turkeys post-coup anti-terrorism policy. According to Turkish officials, the deal between Turkey and the EU
over the refugee crisis will be in jeopardy if the EU doesnt agree to visa liberalization for Turkish citizens by
the end of the year. If the deal breaks down, the influx of refugees will surge dramatically posing another
source of economic and political tensions in Europe.
Greece: The risk of a Greek default and exit from the Eurozone has significantly diminished but it hasnt
been completely erased. Although the Greek government received the necessary funding to continue
servicing debt payments, the road ahead remains bumpy as Greece has to approve more austerity and
structural changes in order to receive additional funding. Furthermore, the funding provided by the EU
to Turkey has kept the number of refugees arriving to Greece at a very low level in recent weeks but a
potential fallout in the negotiations between Turkey and the EU will lead to a surge in that number posing
another risk to the already weak Greek economy.
Unless otherwise noted, all quarterly growth rates are expressed as compound annual rates, all expenditure components of GDP are chained 2009 dollars, and all
annual growth rates are stated as Q4 over Q4.
ZACKS INVESTMENT MANAGEMENT
O N E S WA C K E R D R I V E , C H I C A G O I L
1-800-245-2934
Z I M W E A LT H . C O M
Page 11
Z AC K S I N V E S T M E N T M A N AG E M E N T
History
2016.3
2.9
2.1
1.2
1138
17.5
1.8
75.0
4.9
1.6
1.9
1.4
3.3
2.6
44.9
0.40
1.56
4.26
12.0
4.0
-746
2015
2016
1.9
2.6
0.8
1108
17.4
-1.6
75.5
5.3
0.4
2.0
-3.4
3.1
0.4
48.7
0.13
2.14
5.00
-11.2
-2.1
-478
2017
2018
q4/q4
1.7
2.1 2.0
2.5
2.4 2.6
0.6
3.7 4.1
annual avg.
1165 1297 1477
17.3 17.1 16.9
-0.3
1.8 2.1
75.0 74.7 74.9
4.9
4.6 4.3
q4/q4
1.9
2.1 2.2
2.2
2.2 2.2
0.9
2.2 2.4
1.9
2.9 3.4
0.3
0.8 1.2
42.9 49.6 52.9
annual avg.
0.39 0.86 1.64
1.77 2.13 2.68
4.66 4.55 4.91
q4/q4
5.0
2.2 3.7
4.3
2.6 1.2
-518 -508 -469
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ZACKS INVESTMENT MANAGEMENT
O N E S WA C K E R D R I V E , C H I C A G O I L
1-800-245-2934
Z I M W E A LT H . C O M
Page 12