ECONOMIC REPORT OF THE PRESIDENT

Meanwhile, core inflation (excluding food and energy) is at 1.7 percent
during the 12 months through October and remains below the Federal
Reserve target of 2 percent for the PCE price index (the version of the consumer
price index in the National Income and Product Accounts), partly
due to declining import prices, and below-average capacity utilization. And
so, though the unemployment rate is now close to the rate consistent with
stable inflation, inflation is likely to remain low and unlikely to impose
constraints, at least during the next four quarters. For consumers, continued
growth in nominal and real wage gains in 2016—together with strong
employment growth—will probably continue to boost spending in 2017.
These income gains—following a multiyear period of successful deleveraging—leave
consumers in an improved financial position (Box 2-6). Business
investment also shows brighter prospects for growth in 2017 than in earlier
years as the overhang of excess capital that suppressed investment earlier in
this expansion has been reduced. As the economy continues to grow, businesses
will need new facilities, equipment, and intellectual property to meet
growing demand, and the expected pickup in output growth should support
an uptick in investment as well (Box 2-7), though global headwinds will
continue to be a concern for this sector.
Although most domestic signals are positive, the United States faces
some headwinds from abroad. The available late-2016 indicators suggest
that the economies of China, India, Mexico, and our euro-area trading
partners are growing more slowly than in 2015, while Canada’s growth is
accelerating. The trade-weighted average of foreign GDP growth in the four
quarters ended in 2016:Q3 has been 2.1 percent, down from the 2.3 percent
average growth rate during the preceding four quarters. On the more positive
side, forecasts are for a small pickup in global growth in 2017. Overall
weak growth abroad not only reduces our exports and slows domestic
investment, but also raises risks of adverse financial and other spillovers to
the U.S. economy.
The unemployment rate in November 2016 at 4.6 percent differed
little from the projected long run unemployment rate that is consistent with
stable inflation in the long run, though some broader measures of labor market
slack remain somewhat elevated. These facets of the labor market along
with the fact that the capacity utilization rate in manufacturing, which was
74.9 percent in October, is below its long-run average (80 percent), suggest
that the economy still has a bit of room to grow faster than its potential rate.
The Administration’s economic forecast is presented in Table 2-1.
When the Administration forecast was finalized in November 2016, real
GDP growth during the four quarters of 2016 was projected at 1.9 percent.
Real GDP is projected to grow 2.4, 2.3, and 2.2 percent during the four
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