ANN ARBOR—The U.S. economy, buoyed by low unemployment rates along with robust consumer spending, marked its longest expansion in history this summer yet the pace of growth has cooled.
Get ready for a continued slowdown ahead, as growth slides from 2.9% a year ago to 2.3% this year, and to 1.7% in 2020-21, according to University of Michigan economists. The Fed’s recent “midcycle adjustment” have insulated the economy from a potentially sharper slowdown.
The forecast, produced four times per year by the Research Seminar in Quantitative Economics in the U-M Department of Economics since 1952, was prepared by U-M economists Daniil Manaenkov, Aditi Thapar and Gabriel Ehrlich and researchers Jacob Burton and Wenting Song.
“Economic growth has come down from the sugar high of corporate tax cuts, investment incentives and lavish federal spending,” Manaenkov said. “We’re seeing a continuing pattern of weak investment by businesses as uncertainty over the trade war with China has deterred spending.”
The effects of the Tax Cuts and Jobs Act are long gone and unlikely to be replicated as the ongoing impeachment inquiry takes attention away from the legislative agenda, he said.
Other key economic measures and the forecast based on the Michigan Quarterly Econometric Model of the U.S. Economy include:
Jobs: Job growth has been surprisingly resilient, though the pace slowed for 2019. Job growth slows further for 2020-21 with gains of 1.9 million to 1.6 million annually.
Unemployment rate: The annual unemployment rate closes 2019 at 3.6%, and continues inching down to 3.5% in 2020 and 3.4% in 2021.
Inflation: Inflation remains below the Fed’s 2% target. Consumer Price Index inflation is projected to register 1.8% in 2020 and 1.9% in 2021, driven by price increases in used cars, tobacco and medical services. CPI inflation dropped to 1.7% in 2019 as energy prices fell.
Housing market: Investment in new home construction boosted GDP by nearly two-tenths of a percentage point in the third quarter of 2019 after six quarters of drains. Falling mortgage rates and muted house price inflation have provided a boost to housing markets. Construction of new homes will rise to 1.26 million in 2020 and 1.28 million units in 2021, driven by single-family home starts. The forecast indicates that multifamily housing starts will decline to 360,000 units per year for 2020-21.
Existing home sales, meanwhile, stick at 4.8 million units a year for 2019 and 2020 before rising to 4.9 million units in 2021.
Disposable income: Growth in real disposable income falls to 2.7% for 2019-21, as economic growth slows. Consumption is expected to grow by 2.4% in 2020, and then by 2.1% in 2021.
Light vehicle sales: The UAW-GM strike will make only a small dent in sales for 2019, as GM’s ample supply and substitution for different brands offset production losses, the economists say. They expect light vehicle sales to finish 2019 at 17 million units. The forecast then sees sales falling by 150,000 units in 2020-21.
Interest rates: Mortgage rates will stay under 4%, dropping to 3.9% for a conventional 30-year mortgage by the end of 2019 and 3.7% in 2020 and 3.8% in 2021. Interest rates on the federal government’s debt will fluctuate. By the end of 2021, the 3-month Treasury bill rate will hover at 1.6% and the 10-year Treasury bond yield will reach 2%.
International trade: Both China and the United States have recently shown willingness to de-escalate the trade war. Negotiations are underway on an interim “phase one” agreement. However, a complete resolution of the trade war still appears to be far in the distance.