Following an estimated growth of 2.2 per cent in 2017, the United States of America is forecast to expand at a steady pace of 2.1 per cent in both 2018 and 2019. This marks a significant improvement compared to the 1.5 per cent growth recorded in 2016. The acceleration largely stems from shifting dynamics in business investment and, to a lesser extent, net trade.
Steady growth in the United States is underpinned by a sustained pace of expansion in household spending, estimated at 2.6 per cent in 2017, following growth of 2.7 per cent in 2016. However, over the same period, real personal disposable income growth averaged a mere 1.1 per cent. This indicates that consumers have drawn down savings in order to sustain expenditure growth, resulting in a deterioration of the savings rate by nearly 3 percentage points since 2015. In late 2017, household savings stood at 3.4 per cent of disposable personal income, compared to an average of 5.6 per cent since 1990. Over a longer-term perspective, since 1940, the only other time when the household savings rate dropped below 4 per cent was just prior to the global financial crisis, when household spending was buoyed by excessive optimism and overinflated asset prices. Given that consumer spending cannot be financed indefinitely by a continued drawdown in savings, sustained strength in household demand going forward will depend on firmer growth in real disposable income.
The recent deterioration in savings raises concerns over whether the growth in household spending has been fuelled by inflated asset prices. House prices in the United States are nearly as high today as they were at the peak of the housing market bubble in 2006–2007 (figure III.1), which ultimately acted as one of the triggers of the global financial crisis. Underlying fundamentals in the housing market, however, are more closely aligned with house prices than they were in 2006–2007. The level of investment in housing remains nearly 15 per cent below pre-crisis peaks. Household indebtedness also remains below previous peaks due to a significant deleveraging process, although it has been on the rise since 2013. Mortgage delinquency rates continue to decline, and house prices, when viewed relative to income, remain well below pre-crisis levels (figure III.1). Collectively, these indicators suggest that the housing market does not pose an immediate threat to financial stability, but nonetheless merits monitoring over the forecast period. Further deterioration in household savings, combined with a rise in debt, could signal a buildup of excessive leverage in the household sector.
Despite strong job creation, growth in real personal disposable income has remained weak in the United States. This highlights the weak growth of average wages, which in part reflects stagnant wages at the lower end of the wage spectrum, resulting in a rise in the ratio of mean-to-median wages (figure III.2). The most recent data suggests that wage inequality may have started to improve slightly, although it is premature to identify this as a trend. Going forward, stronger wage growth among lower income earners would help to sustain solid household spending growth, as those on the lower-end of the income scale tend to consume more from current income.
In mid-2017, the unemployment rate in the United States declined to its lowest level since 2001, and is hovering below what is considered its long-run equilibrium level. Nevertheless, pockets of higher unemployment persist in certain sectors and regions of the country. In addition, labour force participation rates of workers over the age of 55 have declined significantly since the global financial crisis. Notwithstanding these prevailing weaknesses, overall labour market conditions have clearly tightened. Given the forecast for steady GDP growth, the tighter labour market is expected to exert some upward pressure on wages in 2018, especially for lower-paid jobs. This should help redress the recent rise in wage inequality. Shifts in income tax brackets and standard deductions expected in the 2018 budget1 may partially offset any improvement in after-tax wage inequality, as independent estimates indicate that the bulk of tax relief would be directed towards households with the highest incomes (Tax Policy Center Urban Institute and Brookings Institution, 2017). The core inflation measure closely monitored by the Federal Open Market Committee (FOMC) of the Fed averaged about 1.6 per cent in 2017, drifting slightly downward from March. This did not deter the FOMC from forging ahead with its balance sheet normalization plan in October 2017 (see further discussion in chapter II). Inflation is expected to rise towards the Fed target of 2 per cent over the course of 2018, contingent on an acceleration in wage growth.
Non-residential investment saw a relatively broad-based revival in 2017, after contracting by 0.6 per cent in 2016. The rise in equipment investment, which accounted for 40 per cent of investment growth in the first three-quarters of the year, is particularly encouraging, as it lays the foundation for a revival in productivity growth. While the United States’ proposed infrastructure plan to support $1 trillion in infrastructure investment has not yet gained traction, a recovery in external demand coupled with expectations for stable domestic growth will continue to support moderate investment growth into 2018. Planned cuts to corporation tax may also encourage investment. However, lingering uncertainties regarding future trade relationships and the withdrawal of monetary stimulus are likely to hold back a more robust rebound in investment activity over the forecast horizon.