US Economic Outlook for 2018 and Beyond

Experts Forecast Steady Growth

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. The factors that cause these changes in the business cycle are supply, demand, capital availability, and the market’s perception of the economic future.

Overview

U.S. GDP growth will rise to 3.1 percent in 2018, 2.5 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 September 26, 2018. This estimate takes into account Trump's economic policies.

The unemployment rate will drop to 3.7 percent in 2018, and 3.5 percent in 2019 and 2020. That's lower than the Fed's 6.7 percent target. But former Federal Reserve Chair Janet Yellen admitted 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. Structural unemployment has increased. These traits are unique to this recovery.

Yellen admitted that the real unemployment rate is more accurate. It's double the widely-reported rate.

Inflation will be 2.1 percent in 2018, 2.0 percent in 2019, and 2.1 percent in 2020. 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 2.0 percent in 2018, and 2.1 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 percent target inflation rate. That gives the Fed room to raise rates to a more normal level.

The U.S. inflation rate history and forecast provides a good basis for predicting the coming years’ inflation levels. 

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. 

Interest Rates

The Federal Open Market Committee raised the current fed funds rate to 2.25 percent on September 26, 2018. It expects to increase this interest rate to 2.5 percent in December 2018, 3.0 percent in 2019, and 3.5 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 2017. 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. This will drive up long-term interest rates, such as those on fixed-rate mortgages and corporate bonds.

But Treasury yields also depend on the 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 2019 and beyond. 

The last time the Fed steadily raised rates was in 2005. It helped cause the subprime mortgage crisis. A majority of Americans believe that the real estate market will crash in the next two years. But there are nine differences between the 2018 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 to 2050. It predicts crude oil prices will average $73/barrel in the second half of 2018 and $74/barrel in 2019. That's for Brent global. West Texas Crude will average around $6/barrel less. The EIA warned that there is still some volatility in the price. It reported that commodities traders believe WTI prices could range between $56/b and $85/b by December 2018.  

Since oil contracts are priced in dollars, a strong dollar depresses oil prices. Oil companies are laying off workers. 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 $87.50/b. This is a quote in 2017 dollars, which removes the effect of inflation. After that, world demand will drive oil prices to the equivalent of $113.56/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 to 2020. While 88 percent of all occupations will experience growth, the fastest growth will occur in healthcare, personal care and social assistance, and construction.

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 to 5 percent. The most significant growth, forecasted at 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, predicted to be 1.8 million jobs; retail, 1.7 million jobs; and hotel/restaurants, 1 million jobs. Another area is miscellaneous services at 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 a bubble in the stock market. That signals the peak of the business cycle. 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. The economy could slow in 2019 as a result of Trump's trade war.

Therefore, the best thing to do 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.