Better outlook for U.S. economy heading into presidential election

OTTAWA, Nov. 3 2016 /CNW Telbec/ - With the U.S. presidential election less than one week away, there is an air of uncertainty in terms of its impact on the U.S. economy. As it stands, The Conference Board of Canada's U.S. Outlook: Autumn 2016 expects the economy to expand by just 1.6 per cent in 2016, with growth accelerating in 2017 to 2.3 per cent.

"Compared to most of the world, the economic situation in the United States is encouraging. Improving private sector investment and steady household spending are the main factors behind the increase in growth," said Kip Beckman, Principal Economist, The Conference Board of Canada.

Highlights

• The U.S. economy will expand by 1.6 per cent this year and 2.3 per cent in 2017.
• Sluggish exports coupled with sharp cuts in capital investment by oil producers is restraining economic growth at the present time.
• Unemployment in the U.S. is currently at 5 per cent and is projected to dip to 4.8 per cent by the end of 2017.

The U.S. economy is expected to continue benefiting from strong consumer spending as tightening labour markets have added steadily to household income. As a result of solid employment gains, firms are reporting difficulty in finding workers and in turn are offering higher wages. Employment is projected to continue to increase at a solid pace over the near term with a gain of 1.8 per cent this year, followed by an increase of 1.6 per cent in 2017.

Household balance sheets have improved as families have sharply lowered their debt burdens over the past five years, largely as a result of locking into low interest rates. This factor, combined with healthy job growth, will help boost household spending by 2.7 per cent this year. Slower personal expenditure growth of 2.5 per cent is anticipated for 2017 due, in part, to slightly higher interest rates over the near term. Rate increases will be modest and certainly won't derail the economic recovery, but will be enough to moderate spending on vehicles and other consumer durable goods.

A weak spot in the U.S. economic outlook is business investment, with real spending on both equipment and structures declining. The vast majority of this slump is attributable to the collapse in oil and other commodity prices, along with the changing nature of U.S. oil production. In contrast to traditional oil producers, those producing shale oil can quickly shut down investment spending when it becomes less profitable to drill for oil. Political uncertainty concerning the upcoming election has also been cited as a factor in weak investment spending. Spending on equipment is expected to decline by 2.3 per cent in 2016 before rebounding and increasing by 2.7 per cent in 2017. If investment spending doesn't rebound next year as is currently anticipated, overall real GDP and productivity growth will be restrained.

Another area of uncertainty is monetary policy. The Federal Reserve (Fed) held off on raising interest rates thus far in 2016. However, the fact that the economy is close to full employment and wages are starting to increase implies that the Fed will likely implement an increase in interest rates in December. We expect that the Fed will continue to tighten at a modest pace in 2017.

The U.S. economy is strengthening, but Canadian industries will not fully capitalize on rising U.S. demand if they are not prepared. The Conference Board of Canada created this interactive tool which shows how Canada's largest export industries are positioned to take advantage of increasing opportunities.

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SOURCE Conference Board of Canada

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