By Kimberly Amadeo
Updated January 01, 2018
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.
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 strctural 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.
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.
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.