Savannah Chamber

12 5 the negative side, businesses' pricing power will not firm dramatically. It is also important to recognize that financial institutions' profit margins will still be constrained by the flatter-than- normal yield curve. International Trade 6 Assuming that a trade war is avoided, both real exports and imports will grow faster than GDP, reflecting the ongoing globalization of input and product markets. Imports will rise much faster than exports, and the 2018 trade gap will be larger than in 2017, so net exports will be a negative factor in terms of GDP growth. The main obstacles to faster U.S. export growth are the same as in 2017: the strong dollar and modest economic growth in the rest of the world. Foreign GDP growth will be faster in 2018 than in 2017, however. One reason why imports will grow in 2018 will be faster growth of domestic consumer spending, which implies faster growth of imports of finished goods as well as more outbound U.S. tourists. In 2018, U.S. export growth will be broad based, and growth will be faster in emerging-market economies than in developed ones. Increases are expected for all of the major categories of goods and services. Exports of services will grow much faster than exports of goods. Among goods, export growth will be fastest for vehicles and parts and industrial materials and supplies. Export growth will be slowest for consumer goods. Capital goods, foods, feeds, and beverages will see moderate gains. The U.S. dollar depreciation will continue through 2018, and it will not help boost exports dramatically because the dollar's value will still be quite high. The 2018 current account deficit will almost equal about 3 percent of GDP, which is higher than in 2017. Inflation and Monetary Policy Consumer price inflation will increase by about 2 percent in 2018, which is the same as expected in 2017. That is close to the level that the Federal Reserve appears to be targeting, which implies that the Federal Reserve will increase policy interest rates modestly in 2018. A tighter job market, higher medical prices, higher rents, and higher energy prices will drive the increase. Most of the usual drivers of inflation will be only slightly more intense. For example, the pace of 2018 GDP growth will be 0.3 percent higher than in 2016. There is still excess capacity in many economic sectors, illustrated by the below-average rate of capacity utilization, which will be higher in 2018 than in 2017. In addition, the strong dollar will keep inflation at bay, but the dollar has been weakening since late 2016. Consumer spending will grow at about the same pace as in 2017. As long as the Federal Reserve does not keep rates too low for too long, the risk of stagflation remains very low. The evidence, however, increasingly suggests that the Federal Reserve must become slightly more aggressive in hiking policy interest rates. The national unemployment rate is closing in on 4 percent. Although the labor market is at full employment, it is unlikely that inflation will be a major problem in 2018. Labor market conditions will continue to improve, but not enough to ignite rapidly accelerating inflation. The bottom line is that the employment situation has improved to the point where labor market conditions will support moderately higher inflation, but not rapidly accelerating inflation. Thus, the Federal Reserve needs to tighten monetary policy to prevent inflation from getting too much traction, but it does not need to do so very aggressively. The precise timing and magnitude of the Fed's future rate increases will depend on both the magnitude and perceived durability of the expansion. Based on the 2018 forecast of sustained modest US GDP growth, the Federal Reserve will continue to increase short-term policy interest rates slowly. The federal funds rate is likely to be about 2 percent at the end of 2018. At that point, short-term policy interest rates will be essentially neutral. Those rate increases will not be high enough to prevent inflation from exceeding its 2 percent target, but it will not exceed it by very much (0.1 percent) if the forecast is correct. In addition to raising policy interest rates, the Federal Reserve will be reducing its balance sheet— unwinding quantitative easing—and probably will allow a proportion of maturing assets to roll off. It will not sell Treasuries or mortgage backed securities. Crude Oil Markets

• Cover