Every year at about this time, I embark on my annual forecasting mission. Projecting the path of the economy is always difficult, and has been particularly so in recent years. In some ways the long-term view is even more challenging because it becomes necessary to factor in sweeping changes which are difficult to imagine at this moment in time. (The Internet, for example, changed the economy in ways that few in the early 1980s could have conceived possible.) However, certain underlying trends, such as demographics, are somewhat more predictable, and other emerging patterns can be factored into the projections. This year’s effort to view our likely economic path has left me feeling refreshingly optimistic.
Although the United States economy experienced a roller-coaster ride during the early years of this century, there has been extensive recovery recently, and economic news is increasingly positive. Output has expanded consistently, and job growth is rising rapidly. Thus far, inflationary pressures have been limited to selected segments (particularly energy), and the Fed is already poised to move into action.
Consumer confidence has held steady and displayed a high level of optimism in most parts of the nation. Numerous businesses are contributing to the advancement of the stock market by boosting capital spending, and the manufacturing sector is resurging, both in the US and abroad, because of the rebuilding of inventories necessitated by consumer purchases and the waning of prolonged skittishness.
Technology industries are experiencing growing demand, and technology investment is on the rise, albeit at a cautious pace. Business fixed investment, especially in computers and structures and capital goods investment are also trending upward.
While the US trade deficit remains high ($489.40 billion imbalance in 2003), an upswing in exports, particularly capital goods, automobiles, industrial supplies, and civilian aircraft is helping to stabilize the domestic economy. The interconnected nature of the economies of nations around the world continues to be an important facet of the future development of the US economy, and trade-related activity is forecast to gradually augment its share of the gross domestic product.
The housing market, a bright feature of the nation’s economic recovery for the past few years, will likely experience a slight decline in the near term, and mortgage rates will probably see moderate increases. Over the long term, however, the housing industry is expected to continue to play an important role in the nation’s economic growth.
Airline travel has picked up and price competition is increasing, especially for domestic flights, which are being affected by the growing presence of discount carriers. The airline industry is likely to remain relatively cyclical in the decades to come, with higher fuel prices causing financial challenges at present.
Concerns linger regarding the war on terror and the extent of future involvement of US military forces in Iraq and elsewhere. Energy prices are also cutting into profits in several industries. However, the US economy is far more insulated from oil price swings than in the past; elevated prices are unlikely to stall the current recovery to any substantial degree. These matters, along with various other uncertainties, have the potential to dampen the short-term resurgence of business activity.
The upswing in business investment and hiring will contribute to growth in the years to come. In addition, the positioning of US firms at the forefront of many areas of emerging technologies can be anticipated to spur future expansion.
Specifically, over the long-term forecast horizon (2003-2030), the US is expected to achieve growth in output (real gross product or RGP) of some 3.14% per annum. (I use compound annual growth rates, meaning they reflect changes in the base from which growth is calculated.) RGP will likely total $22.46 trillion by 2030. Population can be expected by achieve a 0.82% rate of growth per year and reach 363.56 million by 2030. Employment is anticipated to expand to 185.16 million (a 1.32% per year clip).
Although some uncertainties remain at various levels, anxieties are lessening substantially as the US economic recovery continues and the momentum for more extensive expansion in the future picks up pace. Over the long term, the path to growth lies in innovation and high value added business activity. Overall, the outlook for the nation’s economy appears extremely positive.