US Economic Outlook: For 2018 and Beyond
1/1/18
The U.S. economic outlook is healthy
according to the key economic indicators. The most critical indicator is
the gross
domestic product, which measures the nation's
production output. The GDP
growth rate is expected to remain between
the 2 percent to 3 percent ideal
range. Unemployment is forecast to continue at the natural
rate. There isn't too much inflation
or deflation.
That's a Goldilocks
economy. President
Trump promised to increase economic
growth to 4 percent. That's faster than is healthy. Growth at that pace leads
to an overconfident
irrational
exuberance. That creates a boom
that leads to a damaging bust.
Find out what
causes these changes in the business cycle.
Overview
U.S. GDP growth will
rise to 2.5 percent in 2018. It's the same as in 2017, but
better than the 2.1 percent growth in 2016. The GDP growth rate will be 2.1
percent in 2019 and 2.0 percent in 2020. That's according to the most
recent forecast released
at the Federal
Open Market Committee meeting on
December 13, 2017. This estimate takes into account Trump's
policies.
The unemployment rate will
drop to 3.9 percent in 2018 and 2019 but rise to 4.0 percent in 2020.
That's better than the 4.1 percent rate in 2017, and the 4.7 percent rate
in 2016. It's also better than the Fed's 6.7 percent target. But Federal
Reserve Chair Janet Yellen admits a lot of workers are part-time and would prefer
full-time work.
Also, most job growth is in
low-paying retail and food service industries. Some people have been out of work
for so long that they'll never be able to return to the high-paying jobs they
used to have. That means structural
unemployment has increased. These
traits are unique to this recovery. They also make the unemployment rate seem
low.
Yellen considers the real
unemployment rate to be more accurate. It's
double the widely-reported rate.
Inflation will
be 1.9 percent in 2018, 2.0 percent in 2019 and beyond. It was 1.7 percent
in 2017. They are lower than the 2.1 percent rate in 2016, and the 0.7 percent
inflation experienced in 2015. The low rates in those years were caused by
declining oil prices. The core
inflation rate strips out those volatile gas
and food
prices. The Fed prefers to use that rate
when setting monetary policy. The core inflation rate will be 1.9 percent
in 2018, 2.0 percent in 2019 and 2020. (It's unusual that the core rate is that
similar to the regular inflation rate.) Fortunately, the core rate is close to
the Fed's 2.0 percent target
inflation rate. That gives the Fed room to raise
rates to a more normal level. Here's more on the U.S.
Inflation Rate History and Forecast.
U.S. manufacturing is
forecast to increase faster than the general economy. Production will grow 2.8
percent in 2018. Growth will slow to 2.6 percent in 2019 and 2 percent in 2020.
Those forecasts have not yet taken into account President
Trump's promises to create more jobs.
Interest
Rates
The Federal
Open Market Committee raised the current
fed funds rate to 1.5 percent in
December 2017.
It expects to increase
this interest rate to 2.1
percent in 2018, 2.7 percent in 2019, and 2.9 percent in 2020.
The fed
funds rate controls short-term interest
rates. These include banks' prime
rate, the Libor, most adjustable-rate and interest-only loans, and credit
card rates. You can protect
yourself from the Fed's rate hikes by
choosing fixed-rate loans wherever possible.
The Fed began reducing its $4
trillion in Treasurys in October. It initially said it would do so only after
the fed funds rate has normalized to 2.0 percent. But the FOMC decided it would
be better to normalize its balance sheet now. The Fed acquired these securities
during quantitative
easing, which ended in 2014. Since
the Fed is no longer replacing the securities it owns, it will create more
supply in the Treasurys market.
That should raise the yield on
the 10-year
Treasury note. That drives up long-term
interest rates, such as fixed-rate
mortgages and corporate
bonds.
But Treasury
yields also depend on demand for
the dollar. If demand is high, yields will drop. As the global economy
improves, investors
have been demanding less of this
ultra-safe investment. As a result, long-term and
fixed interest
rates will rise in 2017 and beyond.
The last time the Fed raised rates
was in 2005. It helped cause the subprime
mortgage crisis. A majority of Americans believe the real
estate market will crash in the next
two years. There are nine differences between the 2017 housing market and the
2007 market that makes this unlikely.
Oil
and Gas Prices
The U.S.
Energy Information Administration provides
an outlook from
2018-2050. It predicts
crude oil prices will average $57/barrel in 2018.
That's for Brent global. West Texas Crude will average around $4/barrel less.
The EIA warned that there is still some volatility in the price. It reported that commodities
traders believe prices could range
between $48/b and $68/b for March 2018 delivery.
A strong
dollar depresses oil prices. That's
because oil contracts are priced in dollars. Oil companies are laying off
workers, and some may default on their debt. High
yield bond funds haven't done well as a
result.
The oil market is still responding
to the impact of U.S.
shale oil production. That reduced oil
prices 25 percent in 2014 and 2015. The good news for the economy is that it
also lowered the cost of transportation, food, and raw materials for business. That
raised profit
margins. It also gave consumers more
disposable income to spend. The slight slowdown is because both companies and
families are saving instead of spending.
The EIA's energy
outlook through 2050 predicts rising
oil prices. By 2025, the average Brent oil price will increase to $86/b (in
2016 dollars, which removes the effect of inflation). After that, world
demand will drive oil prices to the equivalent of $117/b in 2050. By then, the
cheap sources of oil will have been exhausted, making crude
oil production more expensive.
Jobs
The Bureau
of Labor Statistics publishes an occupational outlook each decade. It goes into great detail about each
industry and occupation. Overall, the BLS expects total employment to increase
by 20.5 million jobs from 2010-2020. While 88 percent of all occupations will
experience growth, the fastest growth will occur in healthcare, personal care and social assistance, and construction.
Furthermore, jobs requiring a master’s degree will grow the fastest while those
that only need a high school diploma will grow the slowest.
The BLS assumes that the economy
will fully recover from the recession by 2020 and that the labor
force will return to full employment
or an unemployment rate of 4-5 percent. The most significant growth (5.7
million jobs) will occur in healthcare and other forms of social assistance as
the American population ages.
The next most substantial increase
(2.1 million jobs) will occur in professional and technical occupations. Most
of this is in computer systems design, especially mobile technologies, and
management, scientific, and technical consulting. Businesses will need advice
on planning and logistics, implementing new technologies, and complying with
workplace safety, environmental, and employment regulations.
Other substantial increases will
occur in education (1.8 million jobs), retail (1.7 million jobs) and
hotel/restaurants (1 million jobs). Another area is miscellaneous services (1.6
million jobs). That includes human resources, seasonal and temporary workers,
and waste collection.
As housing recovers, construction
will add 1.8 million jobs while other areas of manufacturing will lose jobs due to technology and
outsourcing.
How
It Affects You
2018 will be a prosperous year
as we continue to say goodbye to the effects of the financial crisis. Be
on the lookout for irrational
exuberance in the stock
market. That usually signals the peak
of the business
cycle. That means another recession is
probably two to three years out. It all depends on whether President
Trump's tax cuts will create the jobs
he promised.
Therefore, the best thing to is to
stay relentlessly focused on your financial well-being. Continue to improve
your skills and chart a clear course for your career. If you've invested in
the stock market, be calm during any pull-back.
Plummeting commodity
prices, including gold, oil, and coffee, will return to the mean. All in all, an
excellent time to reduce debt, build up your savings, and increase your
wealth.
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