Economists Predict Stronger Economy in 2018

Originally published by: MarketWatchSeptember 25, 2017

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The U.S. economy these days is like an old and reliable car. It’s not going to set any speed records but it’s also not going to break down and leave people stranded.

That sums up the latest quarterly outlook by the nation’s most prominent business economists. They predict the U.S. will only grow a touch faster in 2018 — around 2.4% compared to an estimated 2.2% this year.

Part of the fuel for faster growth in 2018 are expected tax reductions and spending increases by the Trump White House, according to the National Association of Business Economists.

Yet economists also believe there’s just a one-in-four chance of a recession in the next two years,

“A large majority of the panel views a near-term recession as highly unlikely,” said Kevin Swift, vice president elect of the NABE.

The largely worry-free view of the economy stems from it’s mild rate of growth. The U.S. historically has grown more than 3% a year and at times even faster, but in the absence of such high rates of growth, dangerous imbalances apparently have failed to materialize.

The slower rate of growth since the end of the 2007-2009 recession — the U.S. has expanded around 2% a year — also means the Federal Reserve is unlikely to raise interest rates as high as it normally does. Past recessions have often been caused in part by the central bank raising the cost of borrowing quickly or aggressively.

The Fed’s benchmark short-term interest rate, known as fed funds, now ranges from 1% to 1.25%. The NABE predicts the fed funds rate will rise to 2.125% by the end of 2018, but that’s still quite low by historical standards.

The more immediate threats to the economy, NABE respondents said, could come from:

• A war over free trade that leads to sharp restrictions:

• A big reversal in surging U.S. stock markets;

• Or tight immigration rules that limit the supply of labor in a time of growing manpower shortages.

Inflation is not much of a danger, the NABE said. Economist predict annual prices increases will top out at no more than 1.9% in 2018, using the Fed’s preferred PCE inflation gauge.

The now familiar constraints on the economy’s pace of growth are unlikely to ease much, the NABE said. Worker pay, business investment and productivity should all rise in 2018, but not at a rate strong enough to push U.S. growth above 3%.

A lift could come from White House plans to cut taxes and improve public works . But economists are skeptical it will add a big boost — no more than 0.2 to 0.3 percentage points.

The last time the U.S. grew at least 3% was in 2005. The current 12-year stretch of sub-3% growth is the longest on record.

The flip side is, a recovery now nine years old could end up becoming the longest on record if the economy avoids a downturn in the next two years. The current expansion will turn 99 months old at the end of September.

The record is 120 months from 1991 to 2001.