US economic growth – Economists appear to be split on the outlook for the US economy over the next few quarters. One hand you have the pessimists, that seem to be led by SocGen’s Albert Edwards. Last week Edwards proclaimed that the US economy is on the verge of a recession as consumer spending is the only thing holding up economic growth at present. On the other hand, optimists apparently see no reasons to be worried about the state of the US economy and continue to forecast steady economic growth for the rest of this year and 2017.

HSBC’s Chief US Economist Kevin Logan is in the latter camp. In a research note issued to clients earlier this week, Logan and team proclaimed that they see US GDP growth averaging 2.1% for 2017 and inflation will remain low for the next 12 months. With economic growth chugging along and inflation controlled, the team doesn’t expect the Federal Reserve to increase interest rates again until mid-2017.

US economic growth set to recover 

So, why does HSBC’s US economics team believe that the US economy is set to grow steadily over the next few quarters? For a start, the team believes that overall business investment spending will stop declining and will begin to increase at a roughly 3% pace in real terms in the current year. Over the past year, the decline in business investment spending has subtracted about 0.8 percentage points from GDP growth and most of that decline was in the energy sector. Once the drag from the energy sector dissipates, investment spending will begin to recover, and this is the key to HSBC’s growth thesis.

US economic growth set to recover
US economic growth set to recover

US GDP has only increased 1.2% over the last four quarters, excluding the drag and business investment spending GDP growth would have been 2%.

As noted above, the energy sector has been the largest detractor from business investment spending growth for the past two years. As the oil sector learns to live with the lower-for-longer oil price and adjusts to the new normal, investment in the sector should begin to stabilise and/or increase, which, if all else remains constant, should help pull up overall business investment growth and GDP growth. Based on this analysis, HSBC’s US economics team is forecasting GDP growth of 2.1% for 2017 and 1.5% for 2016.

It is not expected that this faster GDP growth will generate much inflation. The team has pencilled in core inflation of 1.7% by the end of this year, rising to 1.8% for 2017, still below the Federal Reserve’s target of 2% giving the central bank room to leave its key interest rate at current levels. Based on these forecasts HSBC is expecting policymakers to wait until mid-2017 before raising the federal funds rate another 25 basis points.