What to Expect From the US Economy in 2018
The US economy got off to a soft start in 2017, but it’s been growing at a reasonably healthy pace lately. Third-quarter growth came in at a 3.2 percent inflation-adjusted annual rate; fourth quarter growth looks to be somewhere between 2.5 percent and three percent.
The unemployment rate has fallen from 4.7 percent at the end of last year to 4.1 percent at last count. The last time it was this low Bill Clinton was president; that was 17 years ago. The US has added two-million jobs in the past year, all of that in the private sector. Government employment has fallen a bit.
We’ve drawn a lot of people into the job market who had been on the sidelines. Inflation is low. The stock market has risen 19 percent over the past year. Interest rates are up but still low by historical standards. Both consumer spending and business investment are accelerating. In short, we’re going into 2018 with substantial momentum.
Best Guess For 2018? More Of The Same
Barring some big disruption like a shooting war with North Korea, a trade war with Mexico, or a constitutional confrontation between President Donald Trump and Congress over the Russia investigation, we’ll see more of the same in 2018. The economies of the US and those of our major trading partners are strengthening. The big tax cut plus expected increases in federal spending will give the US economy a boost in 2018, although some of that depends on how businesses and rich folks choose to use their tax savings. Most economists see unemployment falling towards 3.5 percent in 2018, which is remarkable—and this extremely tight labor market should, at long last, push up wages. The Fed is on track to raise interest rates three or four times in 2018 from still-low levels. But the economy and the markets seem strong enough to absorb that.
Housing Is Coming Back
A decade after the housing bust, housing is coming back. Sales of existing homes have been strong. Builders have picked up the pace of new construction. Nationally house prices are up about six percent over the past year, according to the just-updated S&P Case-Shiller measure and now are above the pre-recession peak. And thanks to those rising home prices, only five percent of homeowners with mortgages owe more than the value of their homes, way down from a few years ago—though more homeowners are still underwater in hard hit places like Las Vegas; Chicago; Miami; Scranton, Pennsylvania; and Akron, Ohio. The tax bill does curtail some tax breaks for home ownership, and that may slow the pace of at which housing prices climb, particularly in high-income, high-housing-price states.
There Are Clouds On The Long-Term Horizon
In any year, there’s about a 20 percent chance of recession—and recessions are hard, most impossible, to predict. So what could go wrong? The Fed could be spooked by inflation and lift interest rates more rapidly than anticipated, slowing the economy and unsettling financial markets. We might see a confidence-shattering drop in stock price—or see a big bank get into trouble and learn that all the seat belts and air bags we added to the financial system were inadequate. Something could go awry overseas—in China, perhaps. Trump’s tough talk on trade could disrupt global supply chains or frighten away business investment.
And there are clouds on the long-term horizon. The growth of productivity—the amount of stuff we produce for each hour of work—is distressing low. That’ll slow the improvement in wages and living standards. We continue to run up the federal debt. That’s not an immediate problem, but at some point it will become one; a faster growing economy will help, but won’t suffice. The inequality gap between the very best off Americans and the rest of us continues to widen. And the opioid crisis is killing people: more people died of drug overdoses in the US in 2016 than died in the entire Vietnam War.
David Wessel is director at Brookings’ Hutchins Center on Fiscal and Monetary Policy. This article originally appeared here.