Economists Stick With Optimistic U.S. Outlook Despite Market Turmoil

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Forecasters see the U.S. economy gathering steam this year and the Federal Reserve raising short-term interest rates three or perhaps four times by the end of 2018.

Economists surveyed in recent days by The Wall Street Journal on average predicted U.S. gross domestic product would rise 2.8% in 2018, accelerating from 2.5% growth in the fourth quarter of 2017 versus a year earlier, supported by the recent package of tax-code changes.

They also projected the unemployment rate would fall below 4% by midyear, from 4.1% in January.

The economists predicted the Fed would raise rates at its next meeting, March 20-21, followed by another move at its June 12-13 meeting.

The central bank in December raised its benchmark federal-funds rate to a range between 1.25% and 1.5%. The economists’ average expectation was for the rate to end the year at 2.21%. That’s consistent with Fed officials’ anticipation of three quarter-percentage-point increases this year, which would lift it to a range between 2% and 2.25%.

The survey respondents’ projections have been inching up as their economic forecasts have grown stronger in recent months. In November, they saw the fed-funds rate ending 2018 at 2.07%.

David Berson, chief economist at Nationwide Insurance, said the Fed was “on the borderline between three-four moves this year.”

The latest survey of 63 business, financial and academic economists was conducted Feb. 2-6, after the release of the January jobs report and during a period of stock-market volatility.

Despite the Wall Street turbulence, the economists remained optimistic about the economy and anticipated the Fed would stick with its plan of gradually raising interest rates under new Chairman Jerome Powell. Some said the chances that officials would move more aggressively than anticipated outweighed the chances they would move less aggressively.

Gus Faucher, chief economist at PNC Financial Services Group, said the Fed under Mr. Powell would maintain “continued gradual tightening.”

The average probability of a recession in the next year was 14%, ticking up from 13% in January’s survey but remaining low. Nearly two-thirds of forecasters said they saw more risk that the economy would grow faster than it would grow more slowly, another sign of optimism about the outlook.

“The tax-cut stimulus and faster wage and salary growth are the garlic to the vampire of recession,” said Sean Snaith, director of the University of Central Florida’s Institute for Economic Competitiveness.

One reason several days of swinging stock prices didn’t rattle forecasters: 59% said they thought U.S. stocks were overvalued, and several others said stocks had been overpriced before their recent decline.

“February’s drop has pushed prices more in line with earnings,” said Lynn Reaser of Point Loma Nazarene University.

The economy has shown signs of strength over the past few months. On Friday, the Labor Department reported average hourly earnings for private-sector workers were up 2.9% in January over the previous year, the largest such gain since 2009.

In theory, continued growth and low unemployment should put upward pressure on inflation, which has undershot the Fed’s 2% target for much of the past five years. Stronger inflation could lead the Fed to pencil in a faster pace of rate increases.

The central bank’s preferred inflation index was 1.7% higher in December than a year earlier. Investors, anticipating stronger inflation, have pushed the yield on the benchmark 10-year Treasury note above 2.8%; it was close to 2% in September.

Several Fed officials have said they could support four rate increases this year if the economy picks up steam.

“The issues of whether we should have three or four rate hikes this year is really going to be driven by the data and changes in the outlook,” San Francisco Fed President John Williams said Friday. “Both of those kind of possibilities are reasonable to think about as options.”

On Wednesday, New York Fed President William Dudley said the past few days of market volatility haven’t affected his view of the economy.

“Having a bump like this has virtually no consequence, in my view, to the economic outlook,” he said.

Write to David Harrison at and Ben Leubsdorf at

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