The Forecast for the US Economy | The Perryman Group

The Forecast for the US Economy

By: Dr. M. Ray Perryman
Published in syndication December 21, 2016

As I look at the US economy and consider the future, I see some good news and some bad news. On balance, I think we'll see continued moderate expansion, but it may be a rocky road at times.

Recent performance is setting the stage for continued economic growth. The unemployment rate declined to 4.6% in November, and total nonfarm payroll employment increased by 178,000 according to the US Bureau of Labor Statistics. Job gains through the first 11 months of 2016 averaged 180,000 per month, down from an average of 229,000 in 2015. The unemployment rate is slightly below what many economists consider to be full employment, though there is evidence of slack in some areas. Professional and business services and health care have been major sources of net new jobs.

In other good news, consumers are spending and feeling fairly confident, and the real estate market is generally healthy. There are some remaining difficulties in terms of long-term unemployment and the uncertainty stemming from the recent elections, but on balance the US economy is performing relatively well.

The Federal Reserve had been close to a decision to raise target rates for interest on federal funds for months and finally moved forward with a change, setting the target range for the federal funds rate at 1/2 to 3/4 percent. Federal Open Market Committee (FOMC) members had been in agreement that the case for an increase in the policy rate was strengthening, but slack remaining in the labor market and inflation continuing to run below target rates led to the decision not to adjust rates until the December meeting. Even with the change, the FOMC noted that the "stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a return to 2 percent inflation." The timing of any future increases will depend on incoming data. An increase in the target interest rate was a needed step toward monetary policy normalcy, both improving the Federal Reserve's balance sheet over time and ensuring inflation remains under control.

With the presidential election now over, a period of adjustment for markets and the US economy is to be expected. Uncertainty will be reduced, but the process of sorting through implications for the economy will take some time. The outcomes will be neither as bad as the worst-case nor as good as the best-case scenarios described during the campaigns.

The US economy will also be negatively affected by slowing expansion in other nations. According to recent forecasts from the Organisation for Economic Co-operation and Development (OECD), "weak trade growth and financial distortions are exacerbating slow global economic growth." The OECD is currently projecting that the global economy will grow at a slower pace this year than in 2015, with little improvement next year. Advanced economies are likely to experience slower growth (due in part to the effects of Brexit), with some improvement in major emerging markets. The OECD sums up the situation by saying that "the world economy remains in a low-growth trap with persistent growth disappointments weighing on growth expectations and feeding back into weak trade, investment, productivity and wages."

Putting it all together, my most recent short-term forecast for the US economy indicates moderate growth is likely. I expect real gross product to increase at a 2.96% annual pace, reaching a level of $19.3 trillion in 2021. Over the next five years, about 12.2 million net new jobs are forecast to be added, for total 2021 employment of 156.6 million. Consumer prices and interest rates are expected to trend upward slightly.

These growth expectations are fairly positive, but not record-breaking rates by any means. There are also other trends that could go either way, including oil prices and markets and military tensions in various areas; dramatic changes could lead to better or worse performance. On balance, I expect the next five years to bring continued improvement.