Published in Economic Development
Jeff Korzenik, senior vice president and chief investment strategist for Fifth Third Investment Management Group Jeff Korzenik, senior vice president and chief investment strategist for Fifth Third Investment Management Group Courtesy Photo

More of the Same: U.S. economy should continue growing, but concerns over wage inflation emerge

BY Sunday, December 24, 2017 03:15pm

Expect the U.S. economy to maintain steady growth through 2018 with continued low unemployment, an even tighter labor market that drives up wages, higher business investment and additional increases in interest rates.

That’s the general view of economists for next year, as the national economy stays on track with moderate growth and gets an expected bump from federal tax reform.

“In a lot of ways, more of the same,” said Jeff Korzenik, senior vice president and chief investment strategist for Fifth Third Investment Management Group, referring to his expectations for the U.S. economic performance in 2018.

The difference next year comes in the form of more wage inflation resulting from a tightening labor market and higher capital expenditures as businesses invest in equipment or machinery to drive up productivity, he said.

“If you have a limited labor force, you have to make them more productive, and the way you do that is through investment,” he said. “So overall growth numbers may look not all that much different to what we’ve seen this year, but we think that the behavior of business decision makers in the economic environment may be a little bit different.”

Korzenik expects U.S. GDP growth of “around 3 percent” in 2018.

Paul Isely, the associate dean and a professor of economics at the Grand Valley State University Seidman College of Business, sees GDP growth of 2.5 percent next year, an outlook that aligns with what many economists predict.

Federal tax reform could bump up GDP growth by 0.2 percentage points, according to Isely.

“The U.S. economy is going to be in pretty good shape in 2018,” Isely said. “Right now, we’re closing out the year pretty strong, we have some good consumer confidence driving it, and we’re looking at 2018 probably as a whole being slightly better than 2017.”

The latest consumer confidence index from The Conference Board was at a 17-year high at 129.5, which Isely calls an “extremely strong number.”

Isely’s outlook for 2018 does come with a caveat. The long period of U.S. economic growth may finally start coming to an end toward the end of the year or at the beginning of 2019. Among his concerns are increasing wage pressures, plus the potential for an inverted yield curve between short- and long-term interest rates, which would make it harder for banks to lend and could lead to a tightening of credit.

“We’re getting long in the tooth. A lot more of the markers are showing that we are getting very close to that next hurdle,” Isely said. “What we show right now is the probability of a recession starting to grow right near the end of 2018 and it continues to grow through ’19 and into 2020.”

At Comerica Inc., Chief Economist Robert Dye projects Real GDP growth of 2.8 percent in 2018, versus an expectation that 2017 will finish at 2.3 percent.

In an updated U.S. economic briefing this month, Dye also predicted unemployment nationally will end up at 4.4 percent for 2017 and then drop further to 3.9 percent next year.

Interest rates will go up as well. Dye predicts three increases next year of a quarter-point each in the federal funds rate.

More than 50 economic forecasters responding to a monthly survey by the National Association of Business Economists estimate that in 2018, the U.S. economy will experience Real GDP growth of 2.5 percent.

University of Michigan economists also expect 2.5 percent Real GDP growth next year with unemployment of 4.2 percent. For 2019, they project Real GDP growth slowing to 2.1 percent  as the national unemployment rate ticks down to 4.1 percent.

FED RATE HIKES EXPECTED

After the Federal Reserve made an expected 0.25-percent increase in the federal funds rate in mid December, U-M economists expect “a measured pace of two hikes per year in 2018 and 2019,” according to their recently released annual outlook.

The continued increase in interest rates has been widely expected and represents a return to normal after they were dropped to emergency levels in the wake of the 2008 financial crisis, said Korzenik at Fifth Third. He expects little effect on the U.S. economy from the higher rates.

“It’s not so much tightening as just normalizing interest rates. That’s not going to have a huge economic impact,” Korzenik said. “The Fed is increasingly confident in economic conditions.”

In a Dec. 13 statement after the latest rate hike, the Federal Reserve Open Market Committee said U.S. economic activity “has been rising at a solid rate” with a strengthening labor market.

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 remain strong.”

The Fed projects Real GDP growth of 2.5 percent next year, followed by 2.1 percent in 2019 and 2 percent in 2020. Unemployment nationally will dip to 3.9 percent in each of the next two years, from an expected 4.1 percent for 2017, according to an outlook the Fed issued this month.

WAGE INFLATION EMERGES

Inflation should “remain somewhat below 2 percent in the near term but (should) stabilize around the Committee’s 2 percent objective over the medium term,” the FOMC said in its statement.

Both Comerica and U-M project the 2018 consumer price index to increase 2.1 percent, up from an estimated 2017 rate of 1.7 percent to 1.8 percent.

Korzinek at Fifth Third believes wage inflation will grow at a faster rate than general inflation because of the tight labor market. Wage inflation “has become a little bit more visible” in 2017 amid low unemployment, and “we think it will become increasingly visible” in 2018, he said.

“For business owners, retention of employees and turnover will become a more critical issue in the year ahead,” Korzinek said. “This problem will be worse and it will be more apparent, and you couple that with your best workers are more likely to be recruited and are open to recruitment in a tighter job market. So these become big challenges for managing businesses in ways that there have not been challenges in the past.”

Korzinek pointed to a median wage tracker by the Atlanta Federal Reserve that has been running at a rate of about 3.5 percent growth during 2017.

Economist Jim Robey, director of regional economic planning at the W.E. Upjohn Institute for Employment Research in Kalamazoo, noted in a presentation this month in Grand Rapids that during the last recession, there were seven people for every job. At present, there’s one person in the workforce for every job, he said.

“That is an incredibly tight labor market,” Robey said.

The U.S. from 2011 to 2014 had a period of “relative wage stagnation” with annualized increases of just 2.1 percent. Between January 2015 and September 2017, as the labor market tightened, wages took “a bit of a step up” to an annualized rate of 2.6 percent growth, Robey said.

“When you start to look at inflation at 1 percent, wages aren’t going up, and the thing that we worry about is with reservation wages — that’s the wage that you’ll do a job,” he said. “Are these doing enough to pull people into the market?” 

MiBiz Staff Writer Nick Manes contributed to this report. 

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