U.S. economy will remain strong over next two years

August 18, 1997

ANN ARBOR—The American economy should remain strong through 1999 with high employment and low inflation, say University of Michigan economists. In their mid-year review and forecast of the U.S. economy, Prof. Saul H. Hymans and researchers Joan P. Crary and Janet C. Wolfe of the U-M Department of Economics predict that unemployment will remain at 4.8-4.9 percent into early next year and will close 1999 near 5 percent. Meanwhile, inflation is forecast to remain in check, with consumer prices expected to rise an average of 2.5 percent over the next two years. “The happy refrain these days seems to be that it doesn’t get any better than this,” Hymans says. “And the ‘it’ in question is not just a low unemployment rate, or a low inflation rate, or a high profit rate, or an exuberant stock market, or a shrinking budget deficit.

“It’s all of those, together, at the same time. ‘It’ is the whole ball of wax. But the very expression of this sentiment carries with it the inevitable concern—can it last?” 

While Hymans and colleagues believe that a greater degree of international competition in product markets has given us a lower natural rate of unemployment, they say that we may not know the point that will trigger the beginnings of an inflationary spiral until we are almost there.

However, they add, the national economy has the capacity to grow at about 2.5 percent annually—any more than that will eventually cause inflation to rise.

“It’s not as though we’re now exceeding the speed limit,” Hymans says. “We’re not. We now suspect that recent and anticipated economic developments will lead the Fed to conclude that further tightening of monetary policy will not be required in the near term. But that’s going to be a very close call and could go either way.”

Even if the Federal Reserve Board decides to nudge interest rates up a notch, the researchers fully expect the economy to continue to expand. They predict that the rate of economic growth will average 2.2 percent during 1998 and 2.4 percent during 1999, following a 2.7 percent increase over the course of this year. In addition, business capital spending is forecast to increase 4.3 percent next year and 3.3 percent in 1999; vehicle sales should edge up from 15 million in 1997 to 15.1 million in 1998 and 15.2 million in 1999; mortgage rates are predicted to be at about 7.7 percent at the end of 1999; housing starts, while slipping, are still expected to be a solid 1.4 million in each of the next two years; and the real net export deficit is projected to improve slightly by the end of next year and then to remain steady in 1999.

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: 

  • The three-month Treasury bill rate will drift up to about 5.25 percent by mid-1999.
  • The 30-year Treasury bond rate will remain near or slightly above 6.5 percent over the next two years.
  • Federal expenditures will increase 3.4 percent this year, 3.3 percent in fiscal 1998 and 3 percent in fiscal 1999.
  • Federal revenues will increase 8.7 percent in fiscal 1997 (thanks to the unusually large surge in personal tax payments this year), 4.4 percent in fiscal 1998 and 2 percent in fiscal 1999.
  • The federal deficit of $129 billion in fiscal 1996 will plummet to $52 billion in fiscal 1997 and to $36 billion in fiscal 1998, before increasing to $50 billion in fiscal 1999. 

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