The outlook for inflation continues to rise, with respondents raising their consumer price index forecasts in this survey and in four of the past five surveys. Year-over-year inflation is forecast to hit 2.45 percent this year, up from a 2.14 percent low forecast last July for 2018.
After a weak first quarter, respondents shaved their outlook a bit for 2018 GDP to 2.7 percent but raised it to 2.8 percent for next year. The probability of recession in the next 12 months remains low at 16.5 percent, though up a bit from earlier this year. Higher interest rates are viewed as the second biggest threat to the economic expansion, behind protectionism.
The growth outlook hinges significantly on whether tax cuts do their job and stimulate growth. And respondents disagree.
"The long-term positive effects of tax reform and less extreme regulation is not being given the merit it deserves," wrote Richard I. Sichel, senior investment strategist at Philadelphia Trust.
But Robert Brusca, chief economist at Fact and Opinion Economics, counters: "I think tax cuts and fiscal stimulus will be the big disappointments of 2018-2019. It will leave Fed policy as too aggressive."
Diane Swonk, chief economist at Grant Thornton, notes how the Fed and fiscal policy are working, seemingly, at cross purposes. "The Fed is attempting to water down the punch and even take a few glasses away, while the administration and Congress are sneaking flasks of grain alcohol into the school dance to spike the punch," Swonk said. "Tensions between the Fed and the rest of Washington will intensify."
More than two-thirds of respondents say the benefits of tax cuts for the U.S. economy will outweigh the drag from higher interest rates, and a similar percentage say the flattening yield curve does not signal a recession. As for the reasons for higher rates, respondents give almost equal weight to all the major factors: the fed, higher inflation concerns, faster growth and bigger deficits.
"The spread between the 2-year and 10-year Treasury is now the tightest it's been since 2007," said Rob Morgan, chief investment officer at Sethi: "The flattening yield curve in 2007 was a harbinger of the Great Recession of 2008. Scary stuff."