The US economy: Ready for takeoff

November 20, 2014
Contact: Bernie DeGroat bernied@umich.edu

ANN ARBOR—The U.S. economy will grow by more than 3 percent next year—its highest rate in 10 years, say economists at the University of Michigan.

Overall economic output growth (as measured by real Gross Domestic Product) will jump from 2.2 percent this year to 3.1 percent in 2015 and 3.3 percent in 2016.

“We expect that 2015 will be the year when U.S. economic growth will finally accelerate meaningfully,” said U-M economist Daniil Manaenkov. “This year, severe winter weather joined the list of headwinds that have prevented U.S. economic growth from picking up. Even still, both private and total payroll job gains during 2014 are on track for their best performance since 1999. And going forward, strong GDP growth supports steady employment gains.”

In their annual forecast of the U.S. economy, Manaenkov and colleague Matthew Hall of the Research Seminar in Quantitative Economics in the U-M Department of Economics project the creation of 5.3 million jobs over the next two years—2.7 million jobs next year and another 2.6 million during 2016.

Net creation of 10.3 million jobs from 2013 through 2016 will be the best four-year stretch since 1997-2000, they say. Accordingly, unemployment will continue to fall to 5.4 percent by the end of next year and to 5 percent by the end of 2016.

“We believe that growth is more than ready to accelerate,” Manaenkov said. “The housing sector is on a more solid footing, well-positioned for growth. The unemployment rate dipped below 6 percent and is likely to keep falling, nudging higher wage growth. The industrial capacity utilization rate is close to normal, which bodes well for investment.

“Despite the change in Senate control, fresh rounds of harsh fiscal austerity are unlikely, and in spite of the projected start of interest rate tightening in 2015, the overall monetary policy stance is likely to remain loose for the duration of our forecast.”

In addition to GDP and employment growth over the next two years, the forecast calls for “a housing market poised to continue its long recovery from the depths of recession,” despite slowly rising mortgage rates expected to hit 5 percent by the end of 2016 for 30-year conventional mortgages.

Construction of new homes, both single-family and multi-unit housing, will continue to rise from a million units this year to more than 1.2 million next year and nearly 1.5 million in 2016. Sales of existing single-family homes are expected to increase from less than 4.4 million this year to nearly 4.7 million in 2015 and about 4.8 million in 2016.

According to Manaenkov and Hall, sales of light vehicles will continue their upward trend from 15.5 million units sold in 2013 and 16.3 million sold this year to 16.6 million in 2015 and 17 million the year after.

“In August, the light vehicle sales pace was the best since January 2006,” Hall said. “The truck sales share has averaged more than 53 percent so far this year, reflecting the strength of small CUV sales and an influx of new truck and SUV models from domestic manufacturers. The sales share of cars made overseas has declined over the summer, reflecting increases in North American production of several popular car models.”

Gas prices, the economists say, should remain relatively stable as the price of oil holds steady around $79-$80 per barrel through 2016. In addition, both consumer price inflation and core inflation (CPI excluding food and energy) will stay below 2 percent through 2016.

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

 

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