More measurable GDP growth should occur in the next several months of 2018
Employers added 2.1 million jobs in 2017, slightly below the 2.2 million added in 2016 and relatively on par with annual growth through most of this long recovery. In spite of the rapid-fire passage of tax reform at year’s end, we expect job growth to register in the low 2-million range again in 2018. Low unemployment is preventing corporations from hiring at a faster pace. The unemployment rate ended last year at 4.1 percent, well below the full-employment threshold. Barring a surge in employment during the first quarter, December’s job report and last year’s full-year performance will keep interest rates stable. We still anticipate three additional rate hikes this year.
Although interest rates will climb this year, investment real estate may get a boost from the new tax legislation. Real estate investors looking for tax breaks that are no longer available from mortgage deductions can acquire single-family rentals and still write off mortgage interest. Furthermore, there is a high likelihood that home prices in some of the high-priced coastal markets will retreat due to higher taxes. This will encourage residents that have been saving for a down payment to continue to rent while deploying that capital into remote property investments that act as tax shelters.
In light of the sweeping tax reform, several major corporations have announced plans to raise wages or pay one-time bonuses to employees. Nonetheless, the number of companies utilizing the significant cost savings to lift wages only represents a fraction of American workers. In the first few months of 2017, the impact of lower costs should become more evident in wage and employment numbers. Many companies may lift wages without leveraging the act as a public relations opportunity. Still, new consumer demand will be the lynchpin for employment growth in 2018 since unemployment is already so low. Tax cuts will need to generate significant demand for new consumer goods to see an acceleration in the job market.
Wage growth expanded by 2.5 percent in 2017, modestly above the inflation rate, and lower than the Fed would like. Going forward, we think wage growth will be lackluster as mature recoveries typically add low-paying secondary jobs rather than core positions like professional and business services. The caveat to this is lower corporate taxes, which could lead to a rebirth in industries that had been dying on the vine for the past several years. Manufacturing, for example, added 10 percent of the jobs created last year. Changes to NAFTA could push even more auto manufacturing jobs north of the border, and lower corporate taxes could encourage some companies to retain or bring back jobs that have been outsourced. Regardless, we do not think this activity will be sufficient to generate GDP growth above 3 percent for 2018.