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January 25, 2017


Real GDP (2.2%)
The U.S. economy grew at a much slower rate in 2016 compared to 2014 and 2015 driven in part
by weak growth at the start of the year. Real GDP growth was only 0.8% in Q1 of 2016
followed by 1.4% growth in Q2. In contrast, initial estimates of Q3 growth were 3.5%, which
represents the largest rate of quarterly real GDP growth since the Great Recession. Our
projection of Q4 growth is 1.6% (the BEA will release data for 2016 Q4 on January 27 th, 2017).
Given this projection for Q4, we are estimating 1.6% annual growth in 2016.
The forecast for real GDP growth in 2017 is 2.2%. Our forecast is clouded in tremendous
uncertainty, however. Now that the new administration is in office, we will learn more about
potential economic policy proposals and their impact on growth as the year evolves. In addition,
there is some uncertainty surrounding the path of the economy as it inches closer to full
employment and Federal Reserve stimulus is removed in moderation. Growth in the early part of
2017 is likely to be subdued as a result of this uncertainty. However, the latter part of 2017 is
likely to be strong.
World economic growth will continue to be a drag on the United States in 2017. The Euro Area,
China and Japan are all expected to grow faster than 2016, but still well below pre-Great
Recession levels. This combined with a strengthening dollar will hamper US exports. As a
result, we expect net exports to continue being a drag on GDP in 2017.
Private fixed investment peaked in 2015Q3. While still a positive contribution to growth, we do
not anticipate the positive impacts on real GDP from private fixed investment to accelerate in
Finally, growth in personal consumption expenditures will continue to be the main source of
growth in real GDP. Consumption is forecasted to contribute between 2% and 2.5% to real GDP
during 2017.
Payroll Employment (1.5%)

Nonfarm payroll employment began to slow during 2016 ending the year with 1.7% growth. We
are forecasting 1.5% growth in nonfarm payroll employment during 2017. This is identical to
our employment growth forecast for 2016 and represents the reality that the labor market is
steadily approaching full employment.
Wage growth was strong during 2016. Average hourly earnings in the private sector grew at
2.5% representing the fastest pace of growth for the post-recession time period. We are
anticipating strong growth again for 2017 of 2%.
Unemployment Rate (4.7%)
The unemployment rate continued to improve in 2016 ending the year at 4.7%. This
improvement is less than the improvement we saw in 2014 and it is expected that further
improvements in the unemployment rate will become increasingly difficult as we approach full
Therefore, we anticipate very little change to the unemployment rate in 2017 as the economy
finds it increasingly difficult to squeeze out the remaining slack in the labor market. Depending
on the dynamics of labor force participation in 2017, it is possible the US could even see
increases in the unemployment rate at times during the year. This could occur as those that have
dropped out of the labor force, re-enter with the hope of finding employment in the improving
economy, but remain unemployed for a period of time while job hunting.
We are confident that the unemployment rate will not end 2017 higher than 2016, but we also
believe that it is unlikely we will see a significant decrease in the unemployment rate. As a
result, we are forecasting the unemployment rate at the end of 2017 to remain near 4.7%.

Consumer Price Index-Headline (2.8%)

Consumer Price Index Core (2.4%)
We are forecasting a significant change in the relationship of headline and core inflation in 2017.
For the first time since mid-2014, we are anticipating that headline inflation will slightly outpace
core inflation for the year. This is highly dependent on the price of oil, which is excluded in
measures of core inflation and has been historically inexpensive over the last 2 years.
Negative demand shocks are no longer the driving force behind cheap oil. Positive supply
shocks are mostly responsible for current price levels. We anticipate, given OPEC statements
and rhetoric, contractions in oil supplies during 2017. This combined with stable world demand

for oil will drive oil prices toward $62 per barrel by the end of 2017 setting the stage for headline
inflation to inch higher than core inflation.
Overall, our current forecasts for real GDP growth, the removal of monetary policy
accommodation and moderate wage increases suggest that inflation should be well contained in

Three-Month Treasury Bill Rate (Year Avg. 1.31%)

Ten-Year Treasury Note Rate (Year Avg. 3.15%)
30-Year Conventional Mortgage Rate (Year Avg. 4.25%)
Our forecasts for interest rates in 2017 are nearly identical to our forecasts from 2016. Rates in
2016 finished well below our forecast, reflecting a Federal Reserve that was far more dovish than
we anticipated. The Federal Reserve has begun the process of normalizing interest rates.
Statements from the Fed are hinting at a 75 basis point increase in the Federal Funds target rate
during 2017. This change in policy, coupled with stronger economic conditions, should lead to
higher interest rates at all maturities across the yield curve. The largest rate increases are likely
to occur in the 3-month Treasury Bill rate as it is very closely tied to the Federal Funds Rate.
Therefore, we are forecasting 3-month Treasury bill rates to end the year at 1.3%.
The forecast for the 10-year Treasury is slightly more uncertain. Recent rate increases have been
consistent along the full spectrum of maturities leaving spreads largely unchanged, but that trend
may not continue in 2017. Market perceptions regarding deficit spending are likely to cause 10year rates to increase at a faster pace than short-term rates widening the spreads between the 10year and shorter maturity bonds. This phenomenon was already occurring in late 2016. The
spread between the 10-year and 3-month stood at 130 basis points in September, but increased to
209 basis points by December. We expect this spread to remain at or above 200 bps through
Housing market dynamics will be as important to the path of 30-year conventional mortgage rate
as Federal Reserve policy decisions during 2017. We are forecasting the mortgage rate to
average 4.25% during 2017, up from an average of 3.65% during 2016. Recent increases in the
30-year mortgage rate have moderated, but we anticipate that rates will move higher again in the
near term as a result of Federal Reserve tightening.