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Sunday, 01 October 2017 17:23

Economists expect growth through 2018, but expectations build for future downturn

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Economists expect growth through 2018, but expectations build for future downturn Illustration by Rachel Harper

Economic outlooks project modest growth in the U.S. for the rest of this year and through 2018, along with further increases in interest rates.

In a new forecast, University of Michigan economists predict Real GDP growth of 2.4 percent for the fourth quarter and 2.2 percent for all of this year. Expansion will pick up a bit to 2.6 percent in 2018 and then settle back to 2.2 percent for 2019, according to the outlook from U-M’s Research Seminar in Quantitative Economics.

After opting last month to maintain interest rates at present levels following two increases earlier in 2017, the Federal Reserve will implement further hikes in 2018, U-M economists predict. They doubt the Fed’s Open Market Committee (FOMC) members will increase rates when they meet again on Dec. 12-13.

“We expect a measured pace of two interest rate hikes per year in 2018-19, with the next hike slated for March 2018. While not impossible, we consider a December hike unlikely due to continuing weakness in measures of inflation and some deceleration in labor market improvement,” according to the U-M outlook released Sept. 19.

Comerica Inc. Chief Economist Robert Dye differs somewhat. He believes a quarter-point increase in the federal funds rates in December is a “reasonable expectation,” followed by further increases in 2018.

The FOMC’s communication following its last meeting is consistent with three possible rate increases next year, he said.

“Forward-looking expectations by the Fed remain for ongoing, gradual rate hikes,” Dye said.

In its latest U.S. economic outlook, Comerica projects Real GDP growth of 2.9 percent in the fourth quarter, followed by 2.5 percent for the first three months of 2018.

Comerica forecasts 2.2 percent growth in Real GDP for all of this year and 2.4 percent for next year.

“The U.S. economy remains on track for an ongoing moderate expansion through 2018,” Comerica economists wrote in their September outlook. “If that turns out to be the case, by the end of 2018, this will be the second-longest economic expansion in U.S. history, still a few months short of the record 120 months from March 1991 to March 2001.”

Federal Reserve board members and bank presidents predict Real GDP growth in the range of 2.2 percent to 2.7 percent for all of this year, and 1.7 percent to 2.6 percent in 2018, according to a statement. Longer term, the U.S. economy will continue to grow at a moderate rate of 1.4 percent to 2.3 percent in 2019, and 1.4 percent to 2.0 percent in 2020, according to economic projections from Fed members and banks.

In a statement following their last meeting, Federal Reserve governors said recent hurricanes that hit Texas and Florida “will affect economic activity in the near term” but are “unlikely to materially alter the course of the national economy over the medium term.”

“Consequently, the (FOMC) continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, and labor market conditions will strengthen somewhat further,” according to the statement.

It’s a situation that will warrant more interest rate increases, they said.

Paul Isely, associate dean and professor of economics at Grand Valley State University’s Seidman College of Business, shares the view for moderate economic growth for the U.S. for 2017 and into 2018, although the new year may start with some weakness. Isely also sees turbulence brewing toward the end of next year.

As a tight labor market drives up wages, limits potential economic growth and pushes down productivity, Isely is tracking indicators in his forecasting methodology that suggest the risk of a downturn will grow toward the end of 2018 and into 2019.

“We’re getting near the end of the game as far as expansion goes,” said Isely, who expects 2017 to finish with Real GDP growth in the range of 2 percent to 2.4 percent amid slower gains in employment.

“We’re pretty safe for 2018, but forecasts out beyond that point are much less solid because some people are suggesting this pool of potential workers is larger than what I’m seeing,” he said. “It will likely be a slow start to 2018 and the recession probability starts growing late in 2018 with a high probability that it will start before the end of 2020.”

For Michigan, economists at Comerica and U-M continue to forecast easing vehicle sales in North America, which could negatively affect activity in the state that’s still heavily reliant on the automotive industry. U-M projects vehicle sales of 16.9 million units in both 2018 and 2019, equal to the rate of 2017. The industry could get a bump in the fourth quarter as people in Texas and Florida replace vehicles damaged in the recent hurricanes, according to the U-M outlook.

Meanwhile, Comerica projects a drop off in vehicle sales from 17.1 million units this year to 16.2 million units in 2018.

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Mark Sanchez

Senior Writer

msanchez@mibiz.com

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