PNC Economists See More Growth, Market Volatility

The current U.S. economic expansion may break the record for longest-ever, as it enters its ninth year in 2018, the report states.

“It may be old in years, but it’s young at heart with a lot of life left,” said Stuart Hoffman, PNC’s senior economic adviser.

Hoffman offered six reasons why “the economy has legs:”

1. Stable oil prices. Today, gas prices average $2.60 a gallon, “quite tame compared to June 2008, when prices soared over $4 a gallon,” Hoffman said.
2. Low inflation — below the Fed’s 2% target — and rising slowly to 2% over the next two years.
3. Only very gradual Federal Reserve interest rate hikes and balance-sheet shrinkage. PNC forecasts three quarter-percentage-point hikes in 2018.
4. Synchronized global economic growth, “the strongest we’ve seen in over a decade,” Hoffman noted.
5. Financially strong consumers and businesses. “Companies’ balance sheets are quite healthy, and consumer debt is low relative to income,” he added.
6. Fiscal stimulus from corporate and individual tax cuts taking effect next year.

“We expect faster economic growth and the unemployment rate to fall to under 4 percent next year,” Hoffman said. “Indeed, for the next couple of years, the U.S. economy has a lot more going for it than not.”

Stock markets: Expect more volatility in 2018

Robust stock market returns were the norm this year. In fact, the S&P 500 is up 17% from the start of 2017. And that’s been the story across the globe, too.

“Investors haven’t had a reason to get nervous this year,” said Bill Stone, chief investment strategist for PNC’s Wealth Management division. “We’ve gone much longer than normal without even a 5 percent decline in the stock market.”

Stone explains that extremely low 10-year Treasury bond yields have supported stock-buying, global economic growth has tamped down market swings, and corporate earnings — which go hand-in-hand with stock prices — are up nearly 10%.

But history tells us that a low-volatility year typically doesn’t repeat itself the next year, he cautions.

“It makes a good argument that we should expect more volatility in 2018,” Stone said. “But a very large downturn in the market doesn’t seem likely any time soon, given the low risk of recession in our view.”