US Economic Outlook: For 2017 and Beyond

Experts Forecast Weak But Steady Growth

economic outlook
You don't need a telescope to see the economic outlook. Illustration: Fanatic Studio/Getty Images

The U.S. economic outlook is healthy according to experts. That's because the GDP growth rate will be between the 2 percent to 3 percent ideal range. Unemployment will continue at the natural rate. There isn't too much inflation or deflation. That's a Goldilocks economy.

Donald Trump promised to increase economic growth to 4 percent. That could create the irrational exuberance that creates damaging booms and busts.

 Find out what causes the business cycle.

Overview

U.S. GDP growth will rise to 2.1 percent in 2017. That's better than the 1.9 percent estimated for 2016 and the same as 2015's growth rate of 2.1 percent. The increase in gross domestic product will remain at 2.1 percent in 2018 and drop to 1.9 percent in 2019. That's according to the most recent forecast released at the Federal Open Market Committee meeting on March 15, 2017.  That begins to take into account the impact of Trump's policies.

The unemployment rate will drop to 4.5 percent in 2017 and beyone. That's better than the 4.7 percent rate in 2016, and the Fed's 6.7 percent target. Most job growth is in low-paying retail and food service industries. Many 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 increased. Federal Reserve Chair Janet Yellen admits a lot of workers are part-time and would prefer full-time work.

That makes the unemployment rate seem artificially low. She considers the real unemployment rate to be more accurate. That rate is usually double the official rate.

Inflation will be 1.9 percent in 2017 and 2.0 percent in 2018 and beyond. These rates are higher the 1.5 percent rate in 2016, and the 0.7 percent inflation experienced in 2015.

Both were caused by low oil prices. The core inflation rate (without gas or food prices) will be 1.9 percent in 2017, and 2.0 percent in 2018 and beyond.  That's close to the Fed's 2.0 percent target inflation rate. 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 3 percent in 2017, and 2.8 percent in 2018. Growth will slow to 2.6 percent in 2019 and 2 percent in 2020.

Interest Rates

The FOMC first raised the Fed funds rate to 0.5 percent in December 2015 and raised interest rates again in December 2016 to 0.75 percent. For more, see Current Fed Funds Rate.

It expects the rate to rise to 1.5 percent in 2017,  2 percent in 2018 and 3 percent in 2019. 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. Find out how to Protect Yourself from Fed Rate Hikes.

The Fed said it would start selling $4 trillion in Treasuries after the Fed funds rate has normalized to about 2.0 percent. The Fed acquired these securities during quantitative easing, which ended in 2014. When it does start selling them, there will be more supply.

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, and vice-versa. As the global economy improves, demand for this ultra-safe investment is falling. As a result, long-term and fixed interest rates will rise in 2017 and beyond.  

Oil and Gas Prices

The U.S. Energy Information Administration outlook is from 2017-2040. It predicts crude oil prices will average $55/barrel in 2017. That's for Brent global. West Texas Crude will average around $1/barrel less.

The EIA warned that commodities traders believe prices will range between $45/b and $65/b for April 2017 delivery.  Prices will rise to $57/b in 2018. (Source: "Short-Term Energy Outlook," EIA, November 8, 2016)

strong dollar continues to depress 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 bonds funds are doing poorly as a result. For more detail, see What's the Forecast for Oil Prices?

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 businesses and families are saving instead of spending. 

By 2020, the average oil price will rise to $76.57/b (in 2015 dollars, which removes the effect of inflation). After that, world demand will start driving oil prices to the equivalent of $104/b in 2030, and $136.21/b in 2040.  By then, the cheap sources of oil will have been exhausted, making crude oil production more expensive. (Source: "Annual Energy Outlook," EIA, July 7, 2016.)

Jobs

The Bureau of Labor Statistics publishes an outlook for U.S. employment 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. (Source: BLS Occupational Outlook Summary)

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 between 4-5 percent. The biggest growth (5.7 million jobs) will occur in healthcare and other forms of social assistance as the American population ages.

The next largest 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. For more detail, see BLS Outlook on Employment

How It Affects You

2017 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 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, a good time to reduce debt, build up your savings, and increase your wealth.