Economic Outlook of the US Economy

Summary

Economic forecasting refers to the process of trying to predict the future state of the economy through a series of different indicators. This process helps to understand the probable future of a nation’s economy and for policymaking to help promote economic growth. When developing an economic forecast, various macroeconomic factors/conditions are taken into consideration. This paper provides an economic forecast of the U.S. economy based on recent economic indicators in 2017 and 2018.

Based on seasonally adjusted annual rates in the fourth quarter of 2017, the gross domestic product growth rate is expected to increase moderately in the first quarter of 2018. As shown in these indicators and based on recent macroeconomic conditions, GDP growth rate in the first quarter of this year is expected to be approximately 2.8%. Additionally, GDP growth rate will continue to increase moderately in the second half of the year to exceed 3.0%.

In light of the increase in Consumer Price Index in the fourth quarter of 2017, inflation rates in the United States are expected to grow by 2.1% in the first quarter of this year. This growth in inflation rates will continue to the second quarter of the year by approximately 2.4%. This is because of the 0.2% and 2.4% increase in consumer prices in February and March respectively. Similarly, core inflation rates, which have been rising since the fourth quarter of 2017, are also expected to grow by 2.1% in the first quarter of 2018. Due to increase in core consumer prices and increase in food and energy prices, core inflation rates will increase by 2.3% in the second quarter of 2018. Food prices in the last quarter of 2017 increased by 0.1% while energy prices increased by 28.2%. It is expected that food prices will increase by approximately 0.5% and energy prices will increase by nearly 15% in the first quarter of this year. However, a marginal decrease is expected in food prices and energy prices in the second half of the year because of volatility of food and energy. The decline in energy prices will largely be influenced by the decrease in the cost of gasoline.

In the last quarter of 2017, United States unemployment rates stood at 4.1% for three consecutive months of this quarter. Unemployment rates in the country are expected to remain the same i.e. 4.1% in the first and second quarter of the year. On the other hand, the rate of underemployment will remain at 8.2% due to near full employment in the U.S. labor market.
Given the spiraling U.S. debt and current macroeconomic conditions, asset prices will continue to be high in the first and second quarter of this year. During the same period, the business cycle will become relatively stronger because of increased interest rates by the Fed. This will also be influenced by the establishment of policies that improve business fundamentals to enhance growth in the stock market and the overall U.S. economy. The U.S. dollar has significantly underperformed against other major world currencies, but value of the currency is expected to strengthen in the first and second quarter of 2018 due to increased interest rates.

The U.S. has recently adopted fiscal and monetary policies that have significant implications on the economy, especially in terms of boosting economic growth. At the beginning of 2018, the U.S. Congress approved fiscal policy that lift government spending in 2018 and 2019. At the same time, the Fed established interest policy that enables increase in interest rates and increased government spending. These policies would boost economic activity in the country and promote economic growth.

Economic Forecast of the U.S. Economy

Economic forecasting is a term that is used to refer to the process of trying to predict the future state of the economy through a series of different indicators. Economic forecasting is not only vital for understanding the probable future of the economy, but is also utilized by policymakers in making policy decisions that seek to promote future economic growth. Some of the most important concepts included in economic forecasting include future gross domestic product growth rate, industrial production, inflation rates, consumer confidence, interest rates, and unemployment rates. Economic forecasts are prepared for different time periods such as quarterly or annually depending on the specific goals of the forecasts. Therefore, economic forecasting is an important process towards enhancing understanding of macroeconomic conditions in a particular country. This paper provides an economic forecast of the U.S. economy using different indicators for the first and second quarter of 2018. The various indicators are utilized to predict the performance of the United States economy in 2018. The forecast is prepared based on indicators obtained from the course web page to demonstrate understanding of various macroeconomic concepts learned in this course. The forecast will also include a discussion of the impact of adopted monetary policy and fiscal policy on the United States economy.

Forecast of Gross Domestic Product

Gross domestic product growth rate is one of the most important aspects for predicting economic growth and development. Gross domestic product (GDP) is the foundation with which governments and businesses make decisions regarding spending, hiring, investments, and policies that affect aggregate economic activity in a country. GDP is a term that refers to monetary measure of the market value of all complete goods and services created with a specific time period either quarterly or annually. It’s regarded as the best way for evaluating a country’s economy since its total value of all products and services produced by businesses and individuals within the country. Therefore, this macroeconomic concept is one of the basic indicators used to examine the status and health of a nation’s economy.

Based on seasonally adjusted annual rates in the fourth quarter of 2017, the gross domestic product growth rate is expected to increase moderately in the first quarter of 2018. The prices of goods and services purchased by residents in the United States increased by 2.5% in the fourth quarter of 2017. In this regard, its expected that these prices of goods and services will continue to increase in the first quarter of 2018 to approximately 3.0%. The expected increase in prices of goods and services is also accompanied by the anticipated increase in food and energy prices. In the fourth quarter of 2017, food prices increased by 0.1% while energy prices increased by 28.2%. A minimal increased of approximately 0.5% and 15.0% in the prices of food and energy is expected in the first quarter of 2018. The projected growth in the gross domestic product in the U.S. in the first quarter of 2018 will also be fueled by the ongoing growth in consumer spending, which has propelled businesses to add capacity in response to the growth. Moreover, the near full employment of the United States economy as at the last quarter of 2017 will influence the moderate acceleration of GDP in the first quarter of 2018.

In the second quarter of 2018, gross domestic product will continue to grow moderately. The expected continued growth rate of GDP is influenced by the macroeconomic conditions in the first quarter of the year. Even though the first quarter of 2018 could be relatively sluggish because of a seasonal quirk, business and consumer confidence continues to be strong while the labor market is almost full employment. GDP growth in the second quarter of 2018 will also be fueled by the impact of $1.5 trillion income tax package on households as established by the Trump Administration. This tax effects, which were enacted in January, will start to have significant impacts on the paychecks of many households in the second quarter of this year. The increase in GDP growth rate during this period will contribute to annual economic growth because of increased government spending, strong business and consumer confidence, increased consumer spending, and lower individual and corporate taxes.

According to Bachman & Majumdar (2018), GDP growth rate in the second quarter of 2018 could increase by approximately 3.0% for several reasons as shown in Figure 1. First, the near full employment of the labor market implies that impact will be experienced in higher inflation instead of more real activity. Secondly, interest rates during this period are likely to increase faster than expected because of increased demand, which will relatively restrain demand for debt-financing products and services like cars and houses. Third, capital costs will have relatively minimal impacts on holding back investments since they have been low for a long period of time. Net exports and inventory spending, which were sluggish in the fourth quarter of 2018 are expected to increase in the second quarter of 2018 after rebounding in the first quarter of the year. The Bureau of Economic analysis reports that net exports bounced back to be a positive contributor to GDP growth in the first quarter of this year by adding 0.2% points following subtraction of 1.16% points from the GDP growth rate in the last quarter of 2017 (Moutray, 2018).

Forecast of Inflation, Core Inflation, Food, and Energy Prices

The second important macroeconomic concept in development of an economic forecast is inflation rates. Inflation rates are determined based on the Consumer Price Index, which is a measure of the total costs of goods and services bought by an ordinary consumer. Through this process, economic forecasters find a means of converting dollar figures into meaningful ways of determining purchasing power. Consumer Price Index (CPI) is used to evaluate changes in the cost of living within a period of time. This is used to determine inflation rates, which is defined as an increased in the average level of prices for goods and services.

In the fourth quarter of 2017, consumer prices in the United States increased by 0.1% based on seasonally adjusted rates provided by the Bureau of Labor Statistics (2018) as shown in Figure 2. It is expected that Consumer Price Index will increase in the first quarter of 2018 following stronger government spending and tax cuts. Additionally, consumer prices in the United States have continued to grow over the past 12 months. Based on the growth in Consumer Price Index in the last quarter of 2017, it is expected that consumer prices in the country will grow by 1.9% in the first quarter of 2018. Therefore, inflation rates in the country will grow by approximately 2.1% in the first quarter of 2018. This expected growth is also influenced by the fact that monthly indicators show that inflation rates have increased from 0.2% to 0.5% amidst wider cost increases. In the second quarter of 2018, inflation rates are expected to grow by 2.4% because of the 0.2% and 2.4% increase in consumer prices in February and March respectively.

Similarly, core inflation rates are also expected to grow by 2.1% in the first quarter of 2018. Core inflation rates have been increasing in the U.S. since the fourth quarter of 2017. Actually, in the last quarter of 2017, core inflation rates increased by 1.8% because of stronger macroeconomic conditions and increase in consumer spending. The increase in core inflation rates is expected to continue in the second quarter of the year by 2.3%. This will be boosted by an increase in core consumer prices as well as expected increases in food and energy prices.

As previously indicated, food prices in the last quarter of 2017 increased by 0.1% while energy prices increased by 28.2%. Given the increase in the prices of goods and services, it’s expected that food prices will increase by approximately 0.5% and energy prices will increase by nearly 15% in the first quarter of this year. In December 2017, the food index increased by 0.2% because of 0.9% increase in the index for poultry, eggs, fish, meats, bakery products, and cereals (Bureau of Labor Statistics, 2018). After a 3.9% increase in November, energy index decreased by 1.2% despite the increase in all energy components in December i.e. gasoline index by 10.7%, electricity index by 2.6%, and natural index by 4.7%.

A marginal decrease in food and energy prices is expected in the second quarter of 2018 based on monthly indicators for March 2018. Energy prices are expected to decrease because of decline in the cost of gasoline and underlying inflation. Gasoline prices in the United States are increasingly volatile, particularly in the last quarter, which is an indicator of anticipated decline in energy prices in the second quarter of the year. Similarly, food prices have remained volatile, which implies that a decline in these prices is expected in the second quarter of this year. The expected decline in food prices in the second quarter of this year will also be influenced by the anticipated increased in food inflation rates by 1.8% during this period.

Forecast of Unemployment and Underemployment

One of the major factors that have influenced the growth of gross domestic product in the United States in the recent past is the near full employment of the labor market. Recent weekly and monthly indicators obtained from the course web page demonstrates that the labor market in the country is near full employment, which has boosted GDP growth rate. The near full employment in the U.S. labor market is evident in the significantly low rates of unemployment in the past few months. Recent indicators have shown that unemployment rates in the United States have reached a 17-year low.

In the last quarter of 2017, United States unemployment rates stood at 4.1% for three consecutive months of this quarter. Based on these rates and other macroeconomic conditions, the unemployment rate is expected to stand at 4.1% in the first quarter of this year. This is primarily because of relatively minimal or no changes in unemployment rates of different groups in the country based on economic indicators for January and February this year. The labor force engagement rate has remained relatively stable through this period, which implies that there will be minimal to no changes in unemployment rates in the country in the second quarter of the year. In that regard, unemployment rates are expected to remain at 4.1% in the second quarter of 2018.
Similarly, underemployment rates in the United States have also continued to steadily decline over the past 12 months. The steady decline in these rates is also attributable to the near full employment in the U.S. labor market. The growth in job and availability of numerous job opportunities have combined to generate a steady decline in the rate of underemployment in the country. The rate of underemployment in the United States is expected to remain at 8.2% in the first and second quarter of 2018. This measure includes part-time employees seeking for full-time jobs and those who are not actively involved in seeking for employment. The steady rate of underemployment rates during the first and second quarter of the year is attributable to the minimal to no changes and near full employment in the labor market.

Forecast of Asset Prices

Asset prices in the United States have remained high because of escalating U.S. debt. While markets have steadily risen in the recent past, the spiraling U.S. debt has had a significant impact on asset prices, which have remained significantly high across the board. In light of recent economic indicators, asset prices will remain high in the first and second quarter of 2018. The expected high asset prices during this period is influenced by various factors and macroeconomic conditions. Some of these factors include the high prices for commercial real estate and multi-family homes and low capitalization rates, which play a critical role in determining the performance of properties in terms of value. Stock and market valuations in recent months have shown that asset prices will continue to be significantly high in the first half of the year. Even though recent measures have been undertaken to elevate asset valuations, high asset prices will continue dominating U.S. economy in the first and second quarter of 2018 because of moderate overall risks to the country’s financial system.

Forecast of the Business Cycle

According to a review of major indicators in December 2017, economic output in the United States has remained relatively strong. Recent economic indicators demonstrate that there is virtually no probability that a recession has started. Additionally, there are no sins of any troubles in the immediate outlook of the U.S. economy. The business cycle in the United States in the first and second quarter is expected to have positive overall trend because of positive economic outlook based on current estimates of data relating to gross domestic product. Based on recent economic indicators, the existing estimate of risk of recession in the U.S. economy remains at 0%. The Federal Reserve has adopted various measures to enhance employment and personal consumption, which are expected to have positive impacts on the return of the business cycle. U.S. economy will experience a gradual return of the business cycle in the first and second quarter of the year because of these measures by the Fed and establishment of policies that improve business fundamentals to enhance growth in the stock market and the overall U.S. economy. Businesses will continue to receive additional support in terms of earnings, revenue, and growth prospects in the first and second quarter of this year because of increased government and consumer spending and tax cuts.

Monetary and Fiscal Policies and their Implications on the Economy

Monetary and fiscal policies have usually been enacted to help in boosting economic growth in the United States. At the beginning of this year, the U.S. Congress approved fiscal policy that lift government spending in the 2018 and 2019 financial years (Mousina, 2018). This fiscal policy was enacted to help keep major government departments funded and resulted in the end of a very short government shutdown. The policy is expected to have significant impacts on the U.S. economy, particularly in relation to boosting economic growth over the next few years. Increased government spending plays a major role in enhancing growth rate of gross domestic product, which contributes to an overall growth of the economy. The fiscal policy for increased government spending to boost economic growth is based on Keynesian model of depression economics. Based on this model, increasing government spending increases economic growth by stimulating the economy (Nallari, 2010). At the same time, interest rate policy has been adopted to enable Federal Open Market Committee (FOMC) to slowly increase the target range for the federal funds rate. This monetary policy is expected to promote economic growth in the United States since its accommodative and supports strong labor market conditions and return to an inflation rate not exceeding 2% (Board of Governors of the Federal Reserve System, 2018). Current fiscal and monetary policies adopted by the Federal Reserve are expected to expand economic activity in the country at a moderate pace and generate strong labor market conditions in the next few years.

Forecast of the Value of the Currency

The U.S. dollar was characterized by relative underperformance throughout 2017 in comparison to other major currencies across the globe. By the close of the 2017 financial year, the U.S. dollar fell by approximately 10% despite popping up by more than 2% in December as shown in Figure 3. Based on the ICE dollar index and exchange rate indicators, the decline of the U.S. dollar by approximately 10% was the biggest annual decline since 2003 (Nelson, 2017). The underperformance of the U.S. dollar in the 2017 financial year is attributable to higher commodity prices and stronger global growth that provided support for emerging currencies in the global market. Despite the significant decline in 2017, it is expected that the U.S. dollar will strengthen in the first quarter of 2018. This will be boosted by tightening of the U.S. dollar liquidity, increase in interest rates, and increased cost of servicing record offshore U.S. dollar debt. As the Fed continues to increase interest rates, the performance of the U.S. dollar will strengthen since this initiative will enhance yields of U.S. Treasuries. The increase in interest rates by the Federal Reserve will also contribute to strengthening of the U.S. dollar in the second quarter of this year. The increase in interest rates will strengthen the value of the U.S. dollar against other currencies in the first and second quarter of this year through making dollar denominated assets more attractive.

In conclusion, economic forecasting is a process that helps to shape economic policies and decision making in light of the existing macroeconomic conditions. This process entails using indicators of different economic activities and macroeconomic concepts to predict the future of a country’s economy. As shown in this analysis, the U.S. economy is expected to continue to grow in the first and second quarter of this year because of relatively stable macroeconomic conditions. The expected growth of the U.S. economy during this period is attributable to insights obtained from economic indicators in the fourth quarter of 2017. Together with the current macroeconomic conditions in the country, these economic indicators demonstrate that the U.S. economy is on the right track of increased growth in 2018. Some of the areas where the U.S. economy will continue to experience growth include gross domestic product, inflation and core inflation rates, decrease in unemployment and underemployment rates, return of the business cycle, and enhanced value of the U.S. dollar.

References

Bachman, D. & Majumdar, R. (2018, March 13). United States Economic Forecast – 1st Quarter 2018. Retrieved May 1, 2018, from https://www2.deloitte.com/insights/us/en/economy/us-economic-forecast/2018-q1.html

Board of Governors of the Federal Reserve System. (2018, February 23). Monetary Policy Report Submitted to the Congress on February 23, 2018, Pursuant to Section 2B of the Federal Reserve Act. Retrieved from the Federal Reserve website: https://www.federalreserve.gov/monetarypolicy/2018-02-mpr-summary.htm

Bureau of Labor Statistics. (2018, January 12). Consumer Price Index – December 2017. Retrieved from U.S. Department of Labor website: https://www.bls.gov/news.release/archives/cpi_01122018.pdf

Mousina, D. (2018, February 16). Econosights – US Fiscal Policy in 2018/19 – Making Sense of the Recent Changes. Retrieved May 1, 2018, from https://www.ampcapital.com/site-assets/articles/latest-news/us-fiscal-policy-making-sense-of-recent-changes

Moutray, C. (2018, April 27). U.S. Economy Grew 2.3% in First Quarter, Boosted By Strong Growth in Business Investment. Retrieved May 1, 2018, from http://www.shopfloor.org/2018/04/u-s-economy-grew-2-3-percent-first-quarter-weaker-consumer-spending/

Nelson, E. (2017, December 30). The U.S. Dollar Just had its Worst Year in More Than a Decade, and 2018 will Bring More of the Same. Retrieved May 1, 2018, from https://qz.com/1164158/the-us-dollar-just-had-its-worst-year-in-more-than-a-decade-and-2018-will-bring-more-of-the-same/

Nallari, R. (2010, March 1). Rethinking Macroeconomic Theory and Policy. Retrieved May 1, 2018, from http://blogs.worldbank.org/growth/re-thinking-macroeconomic-theory-and-policy