US economy to grow at fastest pace in 10 years

November 19, 2015
Contact: Bernie DeGroat bernied@umich.edu

ANN ARBOR—The annual unemployment rate will likely fall below 5 percent next year—the first time since 2007—as the U.S. economy grows at its highest rate in a decade, say economists at the University of Michigan.

The national economy will add 4.7 million jobs over the next two years—2.4 million jobs in 2016 and another 2.3 million during 2017—after gaining 2.9 million jobs this year, according to an annual forecast by Daniil Manaenkov, Gabriel Ehrlich, Matthew Hall, Ben Meiselman and Aditi Thapar at the Research Seminar in Quantitative Economics in the U-M Department of Economics.

Unemployment will continue to fall from last year’s rate of 6.2 percent to 5.3 percent this year, 4.9 percent next year and 4.6 percent the year after, which should help part-time workers who want to find full-time jobs.

Overall economic output growth (as measured by real Gross Domestic Product) will rise from 2.4 percent last year and this year to 2.6 percent in 2016 and 2.9 percent in 2017.

“That ordinary performance during 2015, however, masks a stronger domestic economy slowed by sluggish growth in its trading partners,” Manaenkov said. “Labor market conditions are improving, wage growth is picking up again, vehicle sales are booming and the housing market is continuing its recovery.”

In addition to GDP and employment growth over the next two years, the forecast calls for solid growth in housing starts and light vehicle sales.

Construction of new homes, both single-family and multi-unit housing, will continue to rise from a million units last year to 1.13 million units this year, 1.31 million next year and 1.47 million the year after. Sales of existing single-family homes are expected to increase from 4.3 million last year to 4.7 million this year, 4.9 million in 2016 and 5 million in 2017.

According to Manaenkov and colleagues, sales of light vehicles will stabilize at their September-October pace, averaging 17.4 million sold this year, 18 million next year and 18.1 million the year after.

“There have been only 10 months in which the recorded pace of light vehicle sales exceeded 18 million units. Eight of the 10 months occurred 10 or more years ago, and the other two were September and October 2015,” Hall said. “We project the strong pace of vehicle sales to continue throughout the forecast. In fact, we believe this year will match 2000, the strongest year on record, and the next two years will be even better.”

While the U-M economists predict many positives for the U.S. economy in 2016 and 2017—from vehicle and home sales to employment and GDP growth—all is not rosy, they say.

“The turmoil in financial markets earlier this year served as a reminder that the United States is not insulated from economic events in the rest of the world,” Thapar said. “Over the past year, several of our trading partners experienced weakness in their economies, prices for a wide range of globally traded commodities declined sharply and the dollar appreciated substantially—which, along with the ongoing collapse in oil prices, reduced inflation and adversely affected net exports.”

Despite the weakness in inflation (core Consumer Price inflation is projected to climb no higher than 2 percent by 2017), the U-M forecasters expect the Fed to raise interest rates next month for the first time in nine years.

They predict that the 3-month Treasury bill rate will rise to 1.3 percent by the end of 2016 and to 2.2 percent by the end of 2017; the 10-year Treasury bond yield is projected to reach 2.7 percent by the end of next year and 3.1 percent by the end of 2017; and 30-year mortgage rates are expected to rise from 4.3 percent at the end of 2016 to 4.7 percent at the end of 2017.

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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