US Economic Outlook for 2019 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% to 3% 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%. That's faster than is healthy. Growth at that pace leads to 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.
U.S. GDP growth will slow to 2.1% in 2019 from 3% in 2018. It will be 2% in 2020 and 1.8% in 2021. That's according to the most recent forecast released at the Federal Open Market Committee meeting on June 19, 2019. The projected slowdown in 2019 and beyond is a side effect of the trade war, a key component of Trump's economic policies.
The unemployment rate will average 3.6% in 2019. It will increase slightly to 3.7% in 2020 and 3.8% in 2021. That's lower than the Fed's 6.7% target. But former Federal Reserve Chair Janet Yellen noted 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. You can put this report into perspective by viewing the unemployment rates since 1929.
Inflation will average 1.5% in 2019. It will rise to 1.9% in 2020 and 2.0% in 2021. 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 average 1.8% in 2019, 1.9% in 2020, and 2.0% in 2021. The core rate is slightly below the Fed's 2% target inflation rate. That may push the Fed room to lower interest rates. 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. The MAPI Foundation says increased capital growth and higher exports will boost manufacturing. It predicts production will grow by 3.9% in 2019. It will slow slightly to 2.4% in 2020 and 1.9%in 2021.
The Federal Open Market Committee lowered the current fed funds rate to 2.25% on July 31, 2019. It doesn't expect to increase this interest rate for the foreseeable future. In fact, it hinted it may lower it again in 2019. The Fed is more concerned about inhibiting growth than about preventing inflation. In fact, it doesn't see inflation as a threat anytime in the next two years.
The fed funds rate controls short-term interest rates. These include banks' prime rate, the Libor, most adjustable-rate 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. At the July 31, 2019, meeting, it announced it would stop reducing its holdings.
Since the Fed is no longer replacing the securities it owns, it will create more supply in the Treasurys market. That should have raised the yield on the 10-year Treasury note. This should have driven up long-term interest rates, such as those on fixed-rate mortgages and corporate bonds. Instead, investor concern over global economic volatility has kept rates low.
Treasury yields also depend on the demand for the dollar. If demand is high, yields will drop. If the global economy improves, investors will demand less of this ultra-safe investment.
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 2019 housing market and the 2007 market that makes this unlikely.
Oil and Gas Prices
The U.S. Energy Information Administration provides an outlook from 2019 to 2050. It predicts crude oil prices will average $64/barrel in the second half of 2019. That's for Brent global. West Texas Crude will average around $6.60/barrel less. The EIA warned that there is still some volatility in the price.
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 by 25% 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 $81.73/b. This is a quote in 2018 dollars, which removes the effect of inflation. After that, world demand will drive oil prices to the equivalent of $107.94/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 between 2010 and 2020. While 88% 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%. 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 and implementing new technologies. They will need consulting to comply 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.
The Federal Reserve is taking into account how climate change is affecting the economy. Research from the Richmond Fed estimated that it will reduce U.S. economic growth by 30% over the next century.
The insurance industry ranked climate change as the top risk for 2019. It beat out concerns over cyber damages, financial instability, and terrorism. Almost 25% of actuaries surveyed said climate change was their No.1 risk. In 2017, insurance companies paid out $138 billion in damage claims from natural disasters such as hurricanes, floods, and wildfires. These have become worse and more frequent due to global warming. The industry is frustrated by the lack of action on global warming solutions.
How It Affects You
2019 will experience subdued economic growth, although a recession is unlikely. The effects of President Trump's tax cuts have led to increased stock buybacks, not the jobs he promised. Also, companies are concerned about uncertainty resulting from the trade war. As a result, the yield curve in Treasury notes created an inversion for about a week in December. It signaled that investors believed another recession is probably two to three years out.
The stock market hit several new highs in 2018. That indicated the peak of the business cycle. But it also dropped significantly, stirring fears of a recession. It will probably move sideways in 2019 as investors wait to see how the trade war resolves.
The best thing to do is to stay 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.