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US Economic Weekly Two legislative moves that you need to know

06 January 2017

Macro viewpoint: Two legislative moves that you need to know It is important to understand the process for implementing proposed policy changes in order to gauge the timing of such changes and the impact to the economy. There are two legislative moves to note – the Congressional Review Act may be used to reverse some regulation while the budget reconciliation process could facilitate the repeal of the Affordable Care Act and tax reform.

View from the top: Review: Fed officials generally believe that upside risks have increased due to potential fiscal stimulus, according to the minutes. However, there is still a high level of uncertainty and divergence of views. The 0.4% pop in wages was the highlight of the jobs report, while payroll growth was a decent 159,000. Unemployment ticked up to 4.7% as participation increased.

Preview: The December retail sales report is the main event next week. Our BofA on USA report on Wednesday will provide a preview. We will also hear from a slew of Fed officials, including Chair Yellen on the evening of the 12th.

Tracking: We are now tracking 2.5% for 4Q 16 GDP, with much of the upward revision coming from consumption and inventories data released over the holidays. Strong autos this week added an additional 0.1pp to growth.

Data deck for week of 09 — 13 January

Date Time Indicator Period BofAML Estimate Consensus Previous

1/09/17 15:00 Consumer Credit Nov — $18.2bn $16.0bn 1/10/17 6:00 NFIB Small Business Optimism Dec — 99.5 98.4 1/10/17 10:00 Wholesale Inventories Nov F — 0.9% 0.9% 1/11/17 6:30 BofA on USA Dec — — — 1/12/17 8:30 Initial Jobless Claims Jan 7 255k 265k 235k 1/12/17 8:30 Import Price Index (mom) Dec 0.8% 0.7% -0.3% 1/13/17 8:30 Advance Retail Sales Dec — 0.5% 0.1% 1/13/17 8:30 Retail Sales Less Autos Dec — 0.5% 0.2% 1/13/17 8:30 Core Control Dec — 0.5% 0.1% 1/13/17 8:30 Producer Price Index (mom) Dec 0.2% 0.3% 0.4% 1/13/17 8:30 PPI Ex Food & Energy (mom) Dec 0.1% 0.1% 0.4% 1/13/17 8:30 PPI Ex Food, Energy, Trade (mom) Dec 0.1% 0.2% 0.2% 1/13/17 10:00 U. of Michigan Sentiment Jan P 98.5 98.6 98.2 1/13/17 10:00 Business Inventories Nov — 0.3% -0.2% 1/13/17 14:00 Monthly Budget Statement Dec — -$21.0bn -$136.7bn

Source: BofA Merrill Lynch Global Research, Bloomberg

Economics United States

Table of Contents

Macro viewpoint 2

View from the top 5

Data in the past week 6

Data in the week ahead 8

Upcoming policy speakers 9

FOMC dove-hawk spectrum 9

Economic forecast summary 10

Global economic forecast summary 11

Interest rate forecast summary 11

FX rate forecast summary 11

Monthly CPI forecast update 12

Rolling calendar of business indicators 13

Michelle Meyer US Economist MLPF&S

Lisa C. Berlin US Economist MLPF&S

Alexander Lin US Economist MLPF&S

US Economics MLPF&S

Ethan S. Harris Global Economist MLPF&S

Global Economics Team MLPF&S

Recent publications

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Timestamp: 06 January 2017 02:43PM EST

2 US Economic Weekly | 06 January 2017

Macro viewpoint Michelle Meyer US Economist MLPF&S

Lisa C. Berlin US Economist MLPF&S

Two legislative moves that you need to know • It is important to understand how the proposed policy changes may be

implemented in order to gauge the timing of changes and economic impact.

• Using the Congressional Review Act, the Trump administration and Congress canpotentially overhaul recent regulatory changes. Meanwhile, the budgetreconciliation process could facilitate repeal of the Affordable Care Act and thepassage of tax reform.

• It is difficult to find a strong conclusion on the impact of overall regulation on theeconomy. In regards to taxes, we think that cuts would underpin growth.

When there is a will, there is a way We are two weeks away from the transition of power from the Obama administration to that of President-elect Trump. The agenda of the new administration is full, including intentions to repeal various regulations, repeal and replace the Affordable Care Act (ACA), and comprehensive tax reform. In this piece, we focus on the process by which the new administration and Congress can implement these policies. This gives us important perspective on the likelihood, timing, and magnitude of such changes which we can then filter back into our forecast for the US economy. As we argue below, rapid reversal of regulations could boost business confidence, supporting growth in the short-run, but there is a debate about the medium and long-term implications. Further, regulation needs to be analyzed on a case-by-case basis. We believe that a cut in taxes would be supportive of growth.

Legislative move 1: Congressional Review Act GOP leaders have been planning strategies for how to reverse some of the regulations enacted by the Obama administration. A mechanism for doing so is the Congressional Review Act (CRA). The idea of the CRA is that Congress can issue a “resolution of disapproval” on an executive branch regulation. Congress has 60 “session days” (days that Congress is in session) after the enactment of regulation to pass the resolution of disapproval with a simple majority. The President will then have veto powers. Typically, this is what ends the CRA process — why would a President approve legislation to overturn the regulation that he just approved? But this is not the case today. President-elect Trump seems likely to be in agreement with Congress.

According to the Congressional Research Service, rules submitted to Congress since mid-June last year1 could be subject to review. The regulations most likely to be overturned are “Midnight Rules” — rules that were passed between Election Day and Inauguration Day — as the House has already begun preparing to overturn these rules in one vote. Although the regulation spans a number of topics, focus will likely be on energy, environment, healthcare, labor, and financial sector regulations. For older regulations, the new President could instruct agencies to revisit the regulations or provide guidance on how to enforce them.

Regulation and the economy What would the overhaul of regulations mean for the economy? Unfortunately, there is a shortage of research analyzing the impact of regulatory changes on the economy. This is complicated by the fact that the economic impact of a particular piece of regulation varies based on the nature of the regulation. Research from the OECD focuses on how

1 Note that this date is estimated and is therefore subject to change.

US Economic Weekly | 06 January 2017 3

changes to regulatory policy could change behaviors which combined with external forces, could alter ultimate outcomes2. The paper argues that in order to assess the economic impact, one needs to answer the following questions: 1) how cost-effective is the regulation? 2) how efficient and what are the net benefits? 3) can you measure the direct impact on jobs, competiveness and innovation?

A good place to start is with the Office of Management and Budget (OMB) which provides estimates for the total costs and benefits of regulatory changes over the past 10 years. The latest report in 2015 showed that the agency estimates that benefits have outweighed the costs of regulatory policy (Chart 1). However, there are many disclaimers about the accuracy of these estimates, noting that the analysis is in part based on the prospective estimates made by agencies during the rulemaking process.

One can look at these same regulations and make very different assumptions, as was done by President-elect Trump’s economic advisors — Peter Navarro and Wilbur Ross — who authored a paper scoring the Trump economic plan during the campaign3. (Note that Peter Navarro has been named the head of the Trade Council and Wilbur Ross is the nominee for head of the Commerce Department). They assume that the reduction in regulations under a Trump administration would equate to $200bn annually of savings or 10% of the current regulatory burden. This cash would go to businesses and after making assumptions for tax rates and return on cash, the authors conclude that it would result in $487bn over a ten-year period. Despite the implied precision of this figure, we think it is important to note that there are big assumptions in this calculation and therefore a large error band.

The bottom line is that it is very difficult to measure the costs and benefits of regulations. Referring back to the OECD paper, we believe the emphasis should be on the behavioral adjustment. Will businesses change their investment and spending decisions in the face of changes to regulation? What are the short-term vs. long run consequences of regulatory changes? There are always costs associated with implementing new rules, but they could end up proving to create greater efficiencies in the future. There will also be winners and losers of regulatory changes depending on industry or company. Looking at a recent survey from Gallup, it seems that about half of the business community believes there is too much government regulation of business and industry (Chart 2). With a scaling back of regulation, we could see a boost to confidence and stronger investment — at least in the short-run.

2 Coglianese, Cary. Measure Regulatory Performance: Evaluating the Impact of Regulation and Regulatory Policy. August 2012. 3 Navarro, Peter and Wilbur Ross. Scoring the Trump Economic Plan: Trade, Regulatory, & Energy Policy Impacts. Sept 2016.

Chart 1: OMB estimates of total annual benefits and costs of major rules by fiscal year (2010 dollars)

Source: Office of Management and Budget Note: The bars represent average of the estimates and the lines represent the range.

Chart 2: Share of respondents who think there is too much or too little government regulation of business and industry (%)

Source: Gallup

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'05 '06 '07 '08 '09 '10 '11 '12 '13 '14

Benefit Cost

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2002 2004 2006 2008 2010 2012 2014 2016

Too much Too little


Legislative move 2: Reconciliation process According to comments from GOP leaders, there are two major pieces of legislation in the works: 1) repeal of the ACA and 2) tax reform. Although Republicans have a majority in both the House and the Senate, they only have a “simple majority” in the Senate which means that legislation is subject to filibustering, which could lead to an extended debate in order to prevent a final vote on a bill.

This can be avoided through a process called “reconciliation” which allows for the expedited consideration of tax, spending, and debt limit bills. The process begins with the House and Senate agreeing on a budget resolution4 for the fiscal year that includes “reconciliation directives” for specified Congressional committees. A key distinction of reconciliation bills is that there is a time limit for debate in the Senate, which means it avoids filibuster, and that the bill only needs to be passed by a simple majority.

Based on actions thus far from Congress, the first priority seems to be to use the fiscal year 2017 budget resolution for a reconciliation bill that repeals the major provisions of the ACA related to taxes and spending. Next up will likely be to use the fiscal year 2018 budget resolution for a tax reform reconciliation bill.

The impact on the economy If the reconciliation process as described above is effective, we could see legislation passed in a matter of months that repeals some provisions of the ACA, but it is likely to be effective at least 1-2 years down the road. We think we could see tax reform passed potentially as early as the second half of this year. We expect effective dates of various provisions to be staggered to a degree, with the likelihood that some provisions are phased in over a few years. Still, we think there will be some stimulus kicking in H2 as some provisions may be immediate as to avoid any delay in activity.

We have already accounted for the tax cuts in our forecast, which explains the pickup in growth we expect in the second half of this year and throughout 2018. As we have previously written, tax reform is likely to look similar to the House Tax Reform Task Force Blueprint. In particular, this would mean lower corporate tax rates, lower personal tax rates, and either a mandate or option for corporations to expense investments immediately instead of deducting net interest expense. We expect to see a one-time deemed repatriation, but we are unsure whether this will be part of broader international tax reform. We are also unsure if the House’s border adjustability rule will ultimately be included. Estate and gift taxes may be eliminated. We estimated that tax cuts will add 0.5pp to annualized GDP growth once they are fully implemented.

The repeal of certain ACA provisions could potentially have three effects on the economy: 1) loss of healthcare coverage to a portion of the population; 2) budget burden and 3) change in small business investment and creation. The Committee for a Responsible Federal Budget (CRFB) recently released a report estimating that repealing the ACA in its entirety would cost about $350bn over the decade on a static basis. However, the CRFB also estimates that repealing the ACA would increase the number of uninsured people by 23 million. As we have previously written, this could encourage more people to work and seek jobs with private insurance, expanding the labor force and simply removing people from Medicaid. This stimulus to the economy helps the budget, so the “dynamic cost” according to the CRFB is $150bn. Although small businesses may be relieved of the regulation posed by the ACA, it is possible that much of the savings businesses gain from reduced healthcare costs for their employees will be used to compensate employees for healthcare. Overall, we are not expecting the economic impact from ACA repeal to be outstanding in the near-term.

The process matters The legislative process in the US is complicated. Here is a hint – pay attention to the Congressional Review Act and the budget reconciliation rules. As for the economy, the impact of deregulation is up for debate, but we believe tax cuts will be stimulative.

4 The budget resolution only requires a majority vote to pass, and its consideration cannot be filibustered in the Senate.


View from the top What’s new Review • Fed officials generally believe that upside risks have increased due to potential

fiscal stimulus, according to the minutes. However, there is still a high level ofuncertainty and divergence of views.

• The 0.4% pop in wages was the highlight of the jobs report, while payroll growthwas a decent 159,000. Unemployment ticked up to 4.7% as participation increased.

Preview • The December retail sales report is the main event next week. Our BofA on USA

report on Wednesday will provide a preview. We will also hear from a slew of Fedofficials, including Chair Yellen on the evening of the 12th.

GDP update • We are now tracking 2.5% for 4Q GDP, with much of the upward revision coming

from consumption and inventories data released over the holidays. Strong autosthis week added an additional 0.1pp to growth.

Core views Growth • We are forecasting 1.6% real growth in 2016 and 2.1% in 2017. The unemployment

rate ended at 4.7% in 2016 and should fall to 4.5% by the end of this year.

• The main risk to growth – in both directions – is policy change out of Washington.Our baseline expectation is for across-the-board tax cuts to support growth.

Inflation • Core inflation is set to end last year at 1.7% and core CPI at 2.2%. We expect 1.9%

and 2.3%, respectively, at the end of this year.

• Headline inflation is set to accelerate, peaking in the high-2% range in 1Q17. Thisincrease is due to base effects from the gain in energy prices.

Federal Reserve • We expect the Fed to hike once in 2017, but the risks are to the upside. Once fiscal

stimulus kicks in, we expect the Fed to hike faster – we forecast 3 hikes in 2018.

• President-elect Trump may have the ability to influence 5 seats on the board by themiddle of next year, including Chair when Yellen’s term is up in early 2018.

Chart 3: Average hourly earnings (% yoy in 3-month moving average)

Source: Bureau of Labor Statistics

• The most notable takeaway from the December jobs reportwas the 0.4% mom increase in wages. This resulted in theyoy rate rising to 2.9%.

• Wage growth can be volatile from month to month andeven seasonal adjustment can’t completely control for thenoise. As a result, we would recommend smoothing wagesusing a 3-month average and then calculating growth rates.

• Calculating % yoy growth on the cleaner measure shows aclear uptrend in wage growth. This compares to pre-2015when wage growth was essentially stuck at 2.0%. With thelabor market now at full employment, we expect furthergradual acceleration going forward.

1.0%

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2000 2002 2004 2006 2008 2010 2012 2014 2016

Total private

Production &nonsupervisory


Data in the past week Data deck 02 — 06 January

Date Time Indicator Period Actual Consensus Previous 1/03/17 10:00 Construction Spending mom Nov 0.9% 0.5% 0.5% 1/03/17 10:00 ISM Manufacturing Dec 54.7 53.8 53.2 1/04/17 14:00 FOMC Minutes — — — — 1/04/17 All day Total Vehicle Sales Dec 18.29M 17.70M 17.75M 1/05/17 8:15 ADP Employment Dec 153k 175k 216k 1/05/17 8:30 Initial Jobless Claims Dec 31 235k 260k 265k 1/05/17 10:00 ISM Non-Manufacturing Dec 57.2 56.8 57.2 1/06/17 8:30 Change in Nonfarm Payrolls Dec 156k 175k 178k 1/06/17 8:30 Unemployment Rate Dec 4.7% 4.7% 4.6% 1/06/17 8:30 Average Hourly Earnings mom Dec 0.4% 0.3% -0.1% 1/06/17 8:30 Trade Balance Nov -$45.2bn -$45.4bn -$42.6bn 1/06/17 10:00 Factory Orders Nov -2.4% -2.3% 2.7%


Employment report: wages take the spotlight The December employment report was solid, with 156,000 in nonfarm payroll job gains and 19,000 in upward revisions to the two prior months (November was revised up to 204,000 from 178,000 while October was revised down to 135,000 from 142,000). In our view, the most notable takeaway from the report was the 0.4% mom gain in wages, leaving the year-over-year rate to jump up to 2.9% from 2.5% in the prior month. The unemployment rate increased to 4.7% from 4.6%. This is due to the participation rate increasing to 62.7% from a downwardly revised 62.6% (previously 62.7%), but overall, the unemployment rate has been trending down as the labor market improves.

To read the full report, see US Economic Watch: Wages take the spotlight 06 January 2017.

FOMC minutes: a cautious but more optimistic Fed The December FOMC minutes revealed a more optimistic Fed, but one that is still cautious on the outlook. Officials viewed upside risks to their forecast as having increased due to the prospect of fiscal easing. Indeed, about half of the FOMC officials included the assumption of more expansionary fiscal policy in their projections. However, there is still considerable uncertainty around the timing, size, and composition of new policies, and this will make Fed communication more challenging going forward, as was noted in the minutes. Furthermore, there is still a need for monetary policy to proceed gradually given the constraint of the zero lower bound and the historically low level of the neutral rate.

There was continued debate about the risks to the outlook, though they were viewed as roughly balanced. Growth could be positively or negatively impacted by the performance of foreign economies. On the bright side, business investment may accelerate owing to increased economic confidence, and would also benefit from fiscal easing. If economic growth was stronger than expected, Fed officials noted that it would create upside risk to inflation as well. Other positive risks to the inflation outlook cited were if wage growth or oil prices headed higher. However, a stronger dollar would weigh on inflation (as well as growth). Also, some noted that market-based inflation expectations remain low. On balance, inflation looks set to continue rising gradually as energy and import price headwinds fade.

Fed officials expect the unemployment rate to undershoot NAIRU for the next couple of years. Some viewed this as beneficial to further reducing labor underutilization—evidenced by subdued labor force participation of prime age workers, and elevated levels of part-time for economic reasons and long-term unemployed—and helping inflation return to target, but others voiced concerns that this could lead to an undesirable buildup of inflationary pressures. There was debate over whether moderate growth would lead to a modest or significant undershoot of NAIRU, the latter of which


would require a faster pace of policy tightening. Moreover, there was discussion of whether changes to the outlook could have implications for the reinvestment of proceeds from maturing Treasury securities and principal payments from agency debt and mortgage-backed-securities. This was new language – in the past there was little mention of changes to the balance sheet.

Construction spending ramps up in November Construction spending grew 0.9% mom in November, accelerating from 0.6% (revised up from 0.5%) in October. This surpassed consensus expectations of 0.5%, though was in line with our forecast of 1.0%.

Looking at the details, residential investment posted a solid 1.0% mom increase, and nonresidential similarly grew by 0.8%. There was broad improvement across private and public activity. Within private residential spending, a 1.8% jump in single family and 1.5% rise in home improvement offset a 2.7% plunge in multifamily. The increase in home improvement this month ends a three-month streak of declines. On the public side, federal spending surged 3.1% mom, while state & local spending expanded 0.6%.

ISM surveys: robust readings The ISM manufacturing survey increased to 54.7 in December from 53.2 in November. This was above expectations of 53.8 and is the highest level since December 2014. The new orders index was particularly strong, increasing to 60.2 from 53.0—the biggest monthly increase since 2009. Similarly, the ISM nonmanufacturing index held steady at 57.2 in December, coming in above expectations. This reading is consistent with continued moderate growth in the economy. Looking at the details, we saw a strengthening in the new orders index up to 61.6 from 57.0.

The ISM surveys add to the chorus of other sentiment indicators that all point to stronger confidence broadly in the economy after the election. The question remains about the timing and magnitude of the hand-off from strong confidence to actual expenditures.


Data in the week ahead Monday, January 09


1/09/17 15:00 Consumer Credit Nov — $18.2bn $16.0bn Source: BofA Merrill Lynch Global Research, Bloomberg

Tuesday, January 10


1/10/17 6:00 NFIB Small Business Optimism Dec — 99.5 98.4 1/10/17 10:00 Wholesale Inventories Nov F — 0.9% 0.9%


Thursday, January 12


1/12/17 8:30 Initial Jobless Claims Jan 7 255k 265k 235k 1/12/17 8:30 Import Price Index (mom) Dec 0.8% 0.7% -0.3%


Friday, January 13


1/13/17 8:30 Advance Retail Sales Dec — 0.5% 0.1% 1/13/17 8:30 Retail Sales Less Autos Dec — 0.5% 0.2% 1/13/17 8:30 Core Control Dec — 0.5% 0.1% 1/13/17 8:30 Producer Price Index (mom) Dec 0.2% 0.3% 0.4% 1/13/17 8:30 PPI Ex Food & Energy (mom) Dec 0.1% 0.1% 0.4% 1/13/17 8:30 PPI Ex Food, Energy, Trade (mom) Dec 0.1% 0.2% 0.2% 1/13/17 10:00 U. of Michigan Sentiment Jan P 98.5 98.6 98.2 1/13/17 10:00 Business Inventories Nov — 0.3% -0.2% 1/13/17 14:00 Monthly Budget Statement Dec — -$21.0bn -$136.7bn


Note that forecasts for retail sales will be provided after the release of the December edition of BofA on USA on Wednesday, January 11th. This will provide insight from aggregated BAC credit and debit card spending data.


Upcoming policy speakers

Key speaking engagements and news events* Monday, January 09 9:00am Boston Fed President Rosengren (non-voter) to speak in Hartford, CT

12:45pm Atlanta Fed President Lockhart (non-voter) to speak in Atlanta, GA

Tuesday, January 10 No events scheduled at this time

Wednesday, January 11 No events scheduled at this time

Thursday, January 12 8:30am Philly Fed President Harker (voter) to speak in Malvern, PA 8:30am Chicago Fed President Evans (voter) and Atlanta Fed President Lockhart (non-

voter) to speak in Naples, FL 12:30pm Atlanta Fed President Lockhart (non-voter) to speak in Naples, FL 1:15pm St. Louis Fed President Bullard (non-voter) to speak in New York, NY 7:00pm Fed Chair Yellen to speak in Washington, DC

Friday, January 13 9:30am Philly Fed President Harker (voter) to speak in Philadelphia, PA

*All listed times are Eastern times. Dates and times are subject to change.Source: BofA Merrill Lynch Global Research, Bloomberg, Market News

FOMC dove-hawk spectrum FOMC dove-hawk spectrum

Source: BofA Merrill Lynch Global Research Note: NY Fed President (Dudley) is always a voter.

Powell GovernorsBrainard Tarullo Yellen Fischer

Dovish HawkishDudley

2017 Voters Evans Kashkari Kaplan HarkerRegional Fed

2018 Voters Lockhart Williams Mester Lacker Presidents

2019 Voters Bullard Evans Rosengren George

10 U

S Economic W

eekly | 06 January 2017

Economic forecast summary

Real Economic Activity, % SAAR 2Q 15 3Q 15 4Q 15 1Q 16 2Q 16 3Q 16 4Q 16 1Q 17 2Q 17 3Q 17 4Q 17 2015 2016 2017 2018 Real GDP 2.6 2.0 0.9 0.8 1.4 3.5 2.5 1.5 1.5 2.3 2.3 2.6 1.6 2.1 2.5 % Change, Year Ago 3.0 2.2 1.9 1.6 1.3 1.7 2.1 2.2 2.3 2.0 1.9 Final Sales 3.2 2.5 1.2 1.3 2.6 2.3 2.5 1.4 1.4 2.1 2.1 2.4 2.0 1.9 2.4 Domestic Demand 3.2 3.1 1.7 1.3 2.4 1.5 3.7 1.7 1.7 2.9 2.9 3.1 2.0 2.3 3.0 Consumer Spending 2.9 2.7 2.3 1.6 4.3 3.0 2.7 2.0 2.0 2.7 2.7 3.2 2.7 2.5 2.8 Residential Investment 14.8 12.6 11.5 7.8 -7.8 -4.1 6.5 2.0 2.0 6.0 6.0 11.7 4.7 2.1 6.1 Nonresidential Investment 1.6 3.9 -3.3 -3.4 1.0 1.4 4.9 1.3 1.3 4.2 4.2 2.1 -0.3 2.5 4.7 Structures -2.7 -4.3 -15.2 0.1 -2.1 12.0 9.0 1.0 1.0 5.0 5.0 -4.4 -2.2 4.3 4.7 Equipment -0.3 9.1 -2.6 -9.5 -3.0 -4.5 3.0 1.0 1.0 4.0 4.0 3.5 -2.8 1.0 4.4 Intellectual Property 8.0 2.1 4.5 3.8 9.0 3.2 5.0 2.0 2.0 4.0 4.0 4.8 4.9 3.5 5.1 Government 3.2 1.9 1.0 1.6 -1.7 0.8 1.5 0.7 0.7 1.6 1.6 1.8 0.9 0.9 1.8 Exports 2.8 -2.8 -2.7 -0.7 1.8 10.0 -4.5 1.0 1.0 1.0 1.0 0.1 0.4 1.1 1.0 Imports 2.9 1.1 0.7 -0.6 0.2 2.2 4.5 3.0 3.0 6.0 6.0 4.6 0.9 3.6 5.2 Net Exports (Bil 09$) -525 -547 -567 -566 -559 -522 -577 -592 -606 -642 -677 -540 -556 -629 -752 Contribution to growth (ppts) && -0.1 -0.5 -0.5 0.0 0.2 0.8 -1.2 -0.3 -0.3 -0.8 -0.8 -0.7 -0.1 -0.4 -0.7 Inventory Accumulation (Bil 09$) 93.8 70.9 56.9 40.7 -9.5 7.1 40.0 45.0 50.0 55.0 60.0 84.0 19.6 52.5 68.8 Contribution to growth (ppts) () -0.5 -0.6 -0.4 -0.4 -1.2 0.6 0.7 0.1 0.1 0.1 0.1 0.2 -0.4 0.2 0.1Nominal GDP (Bil $, SAAR) 17998 18142 18223 18282 18450 18651 18873 19041 19207 19411 19607 18037 18564 19316 20159 % SAAR 4.9 3.2 1.8 1.3 3.7 4.4 4.8 3.6 3.5 4.3 4.1 3.7 2.9 4.1 4.4Key Indicators Industrial Production (% SAAR) -2.7 1.5 -3.4 -1.8 -0.8 1.9 -0.6 1.9 1.3 2.2 2.5 0.3 -1.0 1.2 2.1 Capacity Utilization (%) 76.7 76.6 75.8 75.4 75.2 75.5 75.3 75.5 75.7 76.0 76.3 76.7 75.4 75.9 77.0 Nonfarm Payrolls (Avg mom change, 000s) 251 192 282 196 146 212 165 160 163 170 175 229 180 167 171 Civilian Unemployment Rate (%) 5.4 5.1 5.0 5.0 4.9 4.9 4.7 4.7 4.6 4.5 4.5 5.3 4.9 4.6 4.3 Civilian Participation Rate (%) 62.7 62.5 62.6 62.9 62.7 62.8 62.7 62.7 62.7 62.7 62.7 62.7 62.8 62.7 62.7 Productivity (% SAAR) 1.2 2.0 -2.4 -0.6 -0.2 3.1 2.4 0.7 1.0 1.7 1.7 0.9 0.2 1.5 1.9 Personal Savings Rate (%) 5.7 5.9 6.1 6.1 5.9 5.8 6.2 6.1 6.0 5.8 5.8 5.8 6.0 5.9 5.9 Light Vehicle Sales (Millions SAAR) 17.2 17.7 17.9 17.3 17.1 17.5 18.0 17.6 17.7 17.8 17.8 17.4 17.5 17.7 17.9 Housing Starts (Thous. SAAR) 1156 1156 1135 1151 1159 1145 1192 1169 1206 1243 1280 1108 1162 1225 1300 Current Account (% of GDP) -2.6 -2.9 -3.0 -3.2US Budget Balance ($bn, Fiscal Year) -439 -587 -810 -1000Inflation GDP Price Index (% SAAR) 2.2 1.2 0.9 0.5 2.3 1.5 1.7 2.0 2.0 2.0 1.8 1.1 1.3 1.9 1.9 % Change, Year Ago& 1.1 1.0 1.1 1.2 1.2 1.3 1.5 1.9 1.8 1.9 2.0 PCE Chain Prices (% SAAR) 1.8 1.1 0.4 0.3 2.0 1.4 1.4 2.5 2.2 2.4 1.7 0.3 1.0 2.0 1.9 % Change, Year Ago$* 0.3 0.3 0.4 0.9 1.0 1.0 1.3 1.8 1.9 2.1 2.2 Core PCE Chain Prices (% SAAR) 1.8 1.4 1.2 2.1 1.8 1.7 1.4 2.0 2.0 1.9 1.7 1.4 1.7 1.8 1.9 % Change, Year Ago$ 1.4 1.3 1.4 1.6 1.6 1.7 1.7 1.7 1.8 1.8 1.9 CPI, Consumer Prices (% SAAR) 2.4 1.4 0.8 -0.3 2.5 1.6 3.6 3.6 1.3 2.3 1.9 0.1 1.3 2.6 1.9 % Change, Year Ago! 0.0 0.1 0.4 1.1 1.1 1.1 1.8 2.8 2.5 2.7 2.3 CPI ex Food & Energy ( % SAAR) 2.3 1.8 2.2 2.7 2.1 1.9 1.9 2.3 2.3 2.4 2.4 1.8 2.2 2.2 2.5 % Change, Year Ago@ 1.8 1.8 2.0 2.3 2.2 2.2 2.2 2.1 2.1 2.2 2.3 Shaded regions represent BofA Merrill Lynch US Economics Research forecast Source: BofA Merrill Lynch US Economics Research

To view our long-run forecasts, see US Economic Watch: The Long View: Getting to equilibrium 05 October 2016.


Global economic forecast summary

GDP growth, % CPI inflation, % Short-term interest rates, % 2015 2016F 2017F 2018F 2015 2016F 2017F 2018F Current 2016F 2017F 2018F

Global 3.3 3.0 3.4 3.8 2.5 2.4 3.0 2.9 3.44 3.43 3.46 3.60 Global ex US 3.5 3.3 3.7 4.1 3.1 2.6 3.1 3.2 4.07 4.05 4.03 4.02 Euro Area 1.9 1.6 1.4 1.5 0.0 0.2 1.5 1.3 0.00 0.00 0.00 0.00 UK 2.2 2.0 1.1 1.2 0.0 0.6 2.4 2.8 0.25 0.25 0.10 0.10 Japan 1.2 1.0 1.5 1.2 0.8 -0.1 1.3 1.2 -0.10 -0.10 -0.10 -0.10Canada 1.1 1.1 1.5 1.6 1.1 1.5 1.4 1.4 0.50 0.50 0.50 0.25Emerging EMEA 1.0 1.4 1.7 2.3 8.9 5.5 5.9 6.2 6.75 6.43 6.21 6.09Latin America -0.3 -1.2 1.5 2.5 6.0 6.0 4.6 3.9 10.19 10.66 10.56 10.59 Brazil -3.8 -3.5 1.0 3.0 9.0 8.8 4.7 4.6 13.75 13.75 11.25 9.75Emerging Asia 6.2 6.0 6.1 6.3 2.4 2.6 2.9 3.1 4.36 4.32 4.36 4.36 China 6.9 6.7 6.6 6.6 1.4 2.0 1.8 2.1 4.35 4.35 4.35 4.35Shaded regions represent BofA Merrill Lynch Global Economics Research forecast. Source: BofA Merrill Lynch Global Economics Research

Interest rate forecast summary

(% EOP) 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 2014 2015 2016 2017 Fed Funds 0-0.25 0-0.25 0-0.25 0.25-0.50 0.25-0.50 0.25-0.50 0.25-0.50 0.50-0.75 0.50-0.75 0.50-0.75 0.75-1.00 0.75-1.00 0-0.25 0.25-0.50 0.50-0.75 0.75-1.00Fed effective 0.06 0.08 0.07 0.20 0.25 0.30 0.25 0.62 0.62 0.62 0.87 0.87 0.06 0.20 0.62 0.87 3-Month T-Bill 0.02 0.01 -0.02 0.16 0.20 0.26 0.25 0.55 0.60 0.75 0.80 1.00 0.04 0.16 0.55 1.00 3-Month LIBOR 0.27 0.28 0.33 0.61 0.63 0.65 0.84 1.05 1.05 1.25 1.30 1.50 0.26 0.61 1.05 1.50 2-Year T-Note 0.56 0.64 0.63 1.05 0.72 0.58 0.75 1.10 1.35 1.50 1.60 1.65 0.66 1.05 1.10 1.65 5-Year T-Note 1.37 1.65 1.36 1.76 1.20 1.00 1.13 1.85 2.10 2.15 2.20 2.25 1.65 1.76 1.85 2.25 10-Year T-Note 1.92 2.35 2.04 2.27 1.77 1.47 1.60 2.35 2.55 2.60 2.65 2.65 2.17 2.27 2.35 2.65 30-Year T-Bond 2.54 3.12 2.85 3.02 2.61 2.28 2.29 3.10 3.30 3.30 3.35 3.35 2.75 3.02 3.10 3.35 2-Year swap 0.81 0.90 0.75 1.18 0.84 0.73 0.99 1.30 1.53 1.66 1.75 1.80 0.90 1.18 1.30 1.80 5-year swap 1.53 1.79 1.38 1.74 1.17 0.98 1.15 1.88 2.10 2.15 2.20 2.25 1.77 1.74 1.88 2.25 10-year swap 2.02 2.46 2.00 2.19 1.64 1.36 1.14 2.23 2.41 2.44 2.49 2.49 2.28 2.19 2.23 2.49 30-year swap 2.39 2.94 2.52 2.62 2.14 1.83 1.74 2.54 2.70 2.70 2.75 2.75 2.70 2.62 2.54 2.75 Note: Federal funds rate forecasts are modal expectations; other values are for market rates. Shaded regions represent BofA Merrill Lynch US Rates Research forecast. Source: BofA Merrill Lynch US Rates Research

FX rate forecast summary

Spot 17-Mar 17-Jun 17-Sep 17-Dec 18-Mar 18-JunG3 EUR-USD 1.05 1.05 1.02 1.02 1.05 1.06 1.07 USD-JPY 117 112 115 117 120 117 115 EUR-JPY 123 118 117 119 126 124 123 Dollar Bloc USD-CAD 1.32 1.38 1.40 1.41 1.43 1.43 1.41 AUD-USD 0.73 0.73 0.72 0.71 0.70 0.70 0.71 NZD-USD 0.70 0.69 0.68 0.68 0.67 0.67 0.68 Europe EUR-GBP 0.86 0.91 0.89 0.88 0.88 0.88 0.87 GBP-USD 1.23 1.15 1.15 1.16 1.19 1.20 1.23 EUR-CHF 1.07 1.09 1.10 1.11 1.12 1.12 1.13 USD-CHF 1.02 1.04 1.08 1.09 1.07 1.06 1.06 EUR-SEK 9.54 9.40 9.30 9.20 9.15 9.10 9.00 USD-SEK 9.06 8.95 9.12 9.02 8.71 8.58 8.41 EUR-NOK 8.99 8.90 8.80 8.70 8.60 8.50 8.50 USD-NOK 8.54 8.48 8.63 8.53 8.19 8.02 7.94 Note: Spot exchange rate as of day before publishing. The left of the currency pair is the denominator of the exchange rate. Forecasts for end of period. Source: BofA Merrill Lynch Global FX Rates & Commodities Research


Monthly CPI forecast update

Non-seasonally Adjusted Seasonally Adjusted Total CPI Energy Total CPI Core CPI

Level mom yoy Level mom yoy mom yoy mom yoy 2015: Jul 238.65 0.01 0.2 219.85 -0.46 -14.8 0.13 0.2 0.15 1.8 2015: Aug 238.32 -0.14 0.2 213.25 -3.00 -15.0 -0.01 0.2 0.12 1.8 2015: Sep 237.95 -0.16 0.0 201.64 -5.44 -18.4 -0.09 0.0 0.19 1.9 2015: Oct 237.84 -0.04 0.2 194.50 -3.54 -17.1 0.19 0.1 0.20 1.9 2015: Nov 237.34 -0.21 0.5 189.27 -2.69 -14.7 0.15 0.4 0.18 2.0 2015: Dec 236.53 -0.34 0.7 183.38 -3.11 -12.6 -0.11 0.7 0.15 2.1 2016: Jan 236.92 0.17 1.4 180.17 -1.75 -6.5 0.03 1.3 0.29 2.2 2016: Feb 237.11 0.08 1.0 172.06 -4.50 -12.5 -0.17 1.0 0.28 2.3 2016: Mar 238.13 0.43 0.9 179.02 4.04 -12.6 0.09 0.9 0.07 2.2 2016: Apr 239.26 0.47 1.1 185.65 3.71 -8.9 0.41 1.1 0.19 2.1 2016: May 240.23 0.40 1.0 192.67 3.78 -10.1 0.21 1.1 0.20 2.2 2016: Jun 241.02 0.33 1.0 200.04 3.82 -9.4 0.21 1.0 0.16 2.2 2016: Jul 240.63 -0.16 0.8 195.94 -2.05 -10.9 -0.04 0.9 0.09 2.2 2016: Aug 240.85 0.09 1.1 193.52 -1.23 -9.2 0.20 1.1 0.26 2.3 2016: Sep 241.43 0.24 1.5 195.85 1.20 -2.9 0.29 1.5 0.11 2.2 2016: Oct 241.73 0.12 1.6 194.79 -0.54 0.1 0.36 1.6 0.15 2.2 2016: Nov 241.35 -0.16 1.7 191.40 -1.74 1.1 0.20 1.7 0.15 2.1 2016: Dec 241.68 0.14 2.2 195.22 2.00 6.5 0.36 2.2 0.20 2.2 2017: Jan 243.05 0.57 2.6 205.37 5.20 14.0 0.45 2.6 0.19 2.1 2017: Feb 243.94 0.37 2.9 208.27 1.41 21.0 0.12 2.9 0.20 2.0 2017: Mar 245.19 0.51 3.0 213.47 2.49 19.2 0.12 2.9 0.20 2.1 2017: Apr 245.56 0.15 2.6 213.54 0.03 15.0 0.08 2.6 0.18 2.1 2017: May 246.32 0.31 2.5 219.03 2.57 13.7 0.12 2.5 0.19 2.1 2017: Jun 246.89 0.23 2.4 223.82 2.19 11.9 0.14 2.4 0.18 2.1 2017: Jul 247.15 0.11 2.7 222.87 -0.43 13.7 0.23 2.7 0.20 2.2 2017: Aug 247.40 0.10 2.7 220.20 -1.20 13.8 0.20 2.7 0.20 2.2 2017: Sep 247.71 0.13 2.6 217.01 -1.45 10.8 0.17 2.6 0.20 2.3 2017: Oct 247.51 -0.08 2.4 208.82 -3.77 7.2 0.14 2.4 0.20 2.3 2017: Nov 247.01 -0.20 2.3 202.84 -2.86 6.0 0.15 2.3 0.20 2.4 2017: Dec 246.79 -0.09 2.1 201.92 -0.45 3.4 0.15 2.1 0.20 2.4

NSA: Not seasonally adjusted, SA: seasonally adjusted. MoM is monthly percent change; YoY is year-over-year percent change. Source: BofA Merrill Lynch Global Research


Rolling calendar of business indicators Monday Tuesday Wednesday Thursday Friday 09 January 3:00 pm: Consumer credit – Nov

Oct ......................................... $16.0B Sep ........................................ $21.8B

10 January 6:00 am: NFIB Small Business Optimism – Dec

Nov .......................................... 98.4 Oct ........................................... 94.9

10:00 am: Wholesale Inventories – Nov (F)

Nov ............................................. 0.9% Oct ............................................. -0.1%

10:00 am: JOLTS Job Openings– Nov Oct ..................................... 5,534k Sep .................................... 5,631k

11 January MBA Mortgage Applications -(week ending 01/06/17) 6:30 am: BofA on USA – Dec

12 January 8:30 am: Initial Jobless Claims -(week ending 01/07/17) 8:30 am: Import Price Index – Dec

Dec ............................................. 0.8%* Nov ............................................ -0.3% Oct .............................................. 0.4%

13 January 8:30 am: Producer Price Index – Dec

Dec ............................................. 0.2%* Nov ............................................. 0.4% Oct .............................................. 0.0%

8:30 am: Core PPI – Dec Dec ............................................. 0.1%* Nov ............................................. 0.4% Oct ............................................. -0.2%

8:30 am: Core Core PPI – Dec Dec ............................................. 0.1%* Nov ............................................. 0.2% Oct ............................................. -0.1%

8:30 am: Retail Sales – Dec Nov ............................................. 0.1% Oct .............................................. 0.6%

8:30 am: Retail Sales ex. Autos – Dec

Nov ............................................. 0.2% Oct .............................................. 0.6%

8:30 am: Core Control – Dec Nov ............................................. 0.1% Oct .............................................. 0.6%

10:00 am: Business Inventories – Nov

Oct ............................................. -0.2% Sep ............................................. 0.0%

10:00 am: U. of Michigan Consumer Sentiment – Jan (P)

Jan (P) ..................................... 98.5* Dec .......................................... 98.2 Nov .......................................... 93.8

2:00 pm: Monthly Budget Statement – Dec

Nov ................................... -$136.7B Oct ....................................... -$44.2B

16 January Martin Luther King, Jr. Day – markets closed

17 January 8:30 am: Empire Manufacturing – Jan

Dec ............................................. 9.0 Nov ............................................. 1.5

18 January MBA Mortgage Applications -(week ending 01/13/17) 8:30 am: Consumer Price Index – Dec

Nov ............................................. 9.0% Oct .............................................. 1.5%

8:30 am: Core CPI – Dec Nov ............................................. 0.2% Oct .............................................. 0.1%

9:15 am: Industrial Production – Dec

Nov ............................................ -0.4% Oct .............................................. 0.1%

9:15 am: Capacity Utilization – Dec Nov .......................................... 75% Oct ........................................... 75.4%

9:15 am: Manufacturing Production – Dec

Nov ............................................ -0.1% Oct .............................................. 0.3%

19 January 8:30 am: Initial Jobless Claims -(week ending 01/14/17) 8:30 am: Housing Starts – Dec

Nov .................................... 1,090k Oct ..................................... 1,340k

8:30 am: Building Permits – Dec Nov .................................... 1,212k Oct ..................................... 1,260k

8:30 am: Philly Fed – Jan Dec .......................................... 21.5 Nov ............................................. 7.6

20 January Inauguration Day

10:00 am: NAHB Housing Market Index – Jan

Dec .......................................... 70 Nov .......................................... 63

4:00 pm: Net Long-Term TIC Flows – Nov

Oct ............................................ $9.4B Sep ...................................... -$26.2B

23 January 24 January 10:00 am: Existing Home Sales – Dec

Nov ............................................. 5.6M Oct .............................................. 5.6M

10:00 am: Richmond Fed – Jan Dec ............................................. 8 Nov ............................................. 4

25 January MBA Mortgage Applications -(week ending 01/20/17)

26 January 8:30 am: Initial Jobless Claims -(week ending 01/21/17) 10:00 am: Wholesale Inventories – Dec (P)

Nov ............................................. 0.9% Oct ............................................. -0.1%

8:30 am: Advance Goods Trade Balance – Dec

Nov ...................................... -$65.3B Oct ....................................... -$61.9B

10:00 am: New Home Sales – Dec Nov ........................................ 592k Oct ......................................... 563k

10:00 am: Leading Indicators – Dec Nov ............................................. 0.0% Oct .............................................. 0.1%

27 January 8:30 am: GDP qoq ann. – 4Q (A)

3Q ............................................... 3.5% 2Q ............................................... 1.4%

8:30 am: GDP Price Index – 4Q (A) 3Q ............................................... 1.4% 2Q ............................................... 2.3%

8:30 am: Core PCE qoq – 4Q (A) 3Q ............................................... 1.7% 2Q ............................................... 1.8%

8:30 am: Durable Goods Orders – Dec (P)

Nov ............................................ -4.6% Oct .............................................. 4.8%

8:30 am: Durables ex. Trans. – Dec (P)

Nov ............................................. 0.5% Oct .............................................. 0.9%

8:30 am: Core Capital Goods Orders – Dec (P)

Nov ............................................. 0.9% Oct .............................................. 0.2%

8:30 am: Core Capital Goods Shipments – Dec (P)

Nov ............................................. 0.2% Oct ............................................. -0.3%

10:00 am: U. of Michigan Consumer Sentiment – Jan (F)

Dec .......................................... 98.2 Nov .......................................... 93.8

*Projections— subject to revision as additional data become available during the month. P – preliminary reading , S – second reading, T – third reading, F – final reading


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US Economic Weekly - Merrill Lynch · PDF fileUS Economic Weekly Two legislative moves that you need to know ... that Peter Navarro has been named the head of the Trade Council and