US outlook bends but doesn't break as trade stakes rise

In the wake of the advance Q2 GDP report, comprehensive benchmark revisions, July employment report, and recent developments on the trade front, we have made minor changes to our near-term economic outlook. Most importantly, we now assume that 25% tariffs will be implemented on an additional $200bn of imports from China. Our base case is that these tariffs go into effect in the fall but that tensions are resolved within a few quarters, which should limit the impact on growth and consumer inflation.

With respect to our 2018 forecast, the mark-to-market adjustments that we would have made to account for the recent benchmark revision and employment reports are largely offset by changes that take into account our new base case for trade. Our 2018 real GDP growth (Q4/Q4) forecast remains at 3.0%, reflecting a one-tenth negative impact from trade disruptions offsetting the upward revisions to the data for the first half. Similarly, our core PCE inflation projection remains at 2.1%, which includes a one-tenth bump from tariffs offsetting the downward revision to core PCE in the benchmark revision. Our unemployment rate forecast has been raised a tenth to 3.6% by year-end, which reflects stronger than expected labor force participation in recent employment reports.

We have lowered our 2019 growth forecast by a tenth to 2.4%, largely due to modestly diminished business investment. The unemployment rate should fall to 3.4% for year-end 2019 with core PCE inflation rising to 2.3%. Our 2020 growth forecast is unchanged at 1.3%.

The outlook for the Fed remains the same, as well. We continue to expect quarterly rate hikes through the end of 2019, resulting in the fed funds rate topping out at 3.4% in Q4 of next year.

Deutsche Bank