US economy sees temporary rise on federal stimulus

November 15, 2018
Contact: Greta Guest gguest@umich.edu

ANN ARBOR—While the U.S. economy is expected to expand 2.9 percent for the year after a strong 3.5-percent growth rate in the third quarter, the effects of federal spending and tax cut boosts will start to diminish in 2019 before fading out in 2020.

University of Michigan economists are projecting that overall economic output growth, as measured by real Gross Domestic Product, will register another solid year with 2.7-percent growth in 2019. Growth will slow to 1.9 percent in 2020 as the economy cools.

The forecast, produced annually by the Research Seminar in Quantitative Economics in the U-M Department of Economics since 1952, was prepared by U-M economists Daniil Manaenkov, Aditi Thapar and Gabriel Ehrlich and researchers Owen Nie and Jacob Burton.

“The budding trade war with China makes it hard to interpret the economy’s recent performance,” Manaenkov said. “It is unclear how much of the jumps in inventory investment and imports were due to producers ramping up imports in anticipation of increased tariffs on Chinese products.”

Large boosts in federal spending in 2018 and early 2019 along with business fixed investment, which grew after the Tax Cuts and Jobs Act, helped the economy rev up this year.

Other key economic measures and the forecast based on the Michigan Quarterly Econometric Model of the U.S. Economy include:

Jobs: Job growth has sped up from 2017 to 2018, along with the faster growth of real GDP. Job growth slows a bit to 2.3 million jobs in 2019 before decelerating to 1.7 million in 2020.

Unemployment rate: The annual unemployment rate will continue to drift down from an average of 3.9 percent this year to 3.5 percent in 2019 and 3.4 percent in 2020.

Inflation: Inflation remains near the Fed’s 2-percent target. Consumer Price Index inflation is projected to register 2.0-2.1 percent in 2019-2020, after higher oil prices boosted 2018 CPI inflation to 2.5 percent. U-M forecasters expect the trade war with China to have a minor effect on inflation.

Housing market: Construction of new homes will rise to 1.26 million this year, driven primarily by single-family home starts. Yet sales of new homes have been slipping recently from their pace earlier in the year. The month’s supply of new homes rose to 7.1 months in September, up from the 4-6-month range it had stayed in for seven years. Higher supply means a slackening market that could slow new home starts.

Sales of existing single-family homes are expected to decline by about 110,000 units to a total of 4.8 million in 2018 and then stay at about that level for the next two years.

Disposable income: Growth in real disposable income falls to 2.7 percent in 2019 and 2020 as employment growth stalls. Consumption is expected to grow by 2.6 percent in 2019, and then by 2.2 percent in 2020 as interest rates rise.

Light vehicle sales: Robust demand for fleet sales keeps light vehicle sales in the 17.1 million units per year neighborhood in 2018. Light vehicle sales then decline to 16.9 million units in each of 2019 and 2020 as interest rates rise and the economy cools.

Interest rates: Mortgage rates will keep heading up, to 5.1 percent for a conventional 30-year mortgage by the end of 2019 and 5.3 percent a year later. Interest rates on the federal government’s debt will also rise. By the end of 2020, the 3-month Treasury bill rate will rise to 3.2 percent and the 10-year Treasury bond yield will reach 3.6 percent.

 

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