ANN ARBOR—America’s robust economy will continue to grow—albeit at a slower pace—throughout this year and next as unemployment and inflation edge slightly upward, say University of Michigan economists.

“We expect the U.S. economy to keep on expanding for at least the next two years—barring any large and sustained drop in the stock market,” says Saul H. Hymans, U-M professor of economics. “The latter would hand quite a jolt to U.S. households who’ve been spending a larger and larger share of the flow of current income in response to the record expansion in the stock market.

“We are, however, expecting a significant slowdown as exports grow only slowly and households narrow the gap between spending and income growth.”

In their annual forecast update of the U.S economy, Hymans and colleagues Joan P. Crary and Janet C. Wolfe predict that economic growth will slow from the current quarter’s pace estimated at 4.3 percent (the same rate posted overall in 1998) to 2.3 percent in the second quarter of this year. Growth will decline even further, they say, to a meager 1.5 percent from mid-1999 to mid-2000, before edging upward to 2 percent in the second half of next year and to more than 2.5 percent going into 2001.

They say that unemployment will remain at about 4.4 percent through the middle of this year and then will increase to about 5 percent by the end of next year. Likewise, inflation in consumer prices is expected to rise from 0.8 percent in 1998 to 1.6 percent in 1999 and 2.2 percent in 2000.

Interest rates, the researchers add, should remain fairly stable near current levels throughout this year and next and into early 2001. The conventional mortgage rate is expected to hold at about 7 percent this year, before edging downward to 6.7 percent by spring 2000. Rates for three-month Treasury bills and 30-year Treasury bonds are predicted to stay at about 4.5 percent and 5.5 percent, respectively, through early 2001.

Hymans and colleagues say that it is unrealistic and even dangerous for Americans to expect the economy to maintain its torrid pace of the past three years—spectacular economic growth that has resulted in the lowest annual unemployment rate since 1969, the lowest calendar year (1998) inflation rate since 1963, the lowest conventional mortgage rate in more than 25 years, and the first federal budget surplus in three decades.

“What interpretation can reasonably be placed on this record of sensational performance?” Hymans says. “First, good economic policy pays off, and second, there’s quite an advantage to being just about the only big, booming, high-pressure economy around. Had much of the rest of the world been booming along with us, we’d surely not be at a combination of 4.5 percent unemployment and 1 percent inflation.

“In other words, it would be very dangerous to hold the notion that there’s some new economic reality according to which we should expect to keep booming along at 3.5 percent to 4 percent per year. The implication for the near term is that our recent growth pace has to be regarded as unsustainably high, and that a prospect of slower growth with somewhat more inflation should be viewed as the expected return of a perfectly normal state of affairs.”

The U-M forecast, based on the Michigan Quarterly Econometric Model of the U.S. Economy and compiled by the U-M Research Seminar in Quantitative Economics, also predicts that: