If Bill Strauss, senior economist and economic advisor at Federal Reserve Bank of Chicago, is correct, the U.S. economy will keep expanding the next couple of years, albeit at a more-typical pace.
Speaking at Heavy Duty Aftermarket Dialogue in Las Vegas Jan. 28, Strauss said the economy should expand at a pace somewhat above trend in 2019 and be at around trend in both 2020 and 2021. In addition, he said, Blue Chip, a group of 50 non-federal economists, also expects a slowing path for economic growth over the next two years.
Strauss reviewed what happened in 2018:
- Gross Domestic Product expanded by 3% over 2017.
- Employment levels increased by more than 2.6 million jobs in 2018
- Unemployment has fallen to 3.9%. For 2019, Blue Chip anticipates unemployment edging down in 2019, but going higher in 2020, but still remaining below 4%.
- Wages and benefits are increasing at a very slow rate, but Strauss believes that may be changing and that there will be a pick up on both wages and benefits.
- The Blue Chip forecast projects a continuing deterioration in the balance of trade.
He said the impressive 3% growth in 2018 was the result of “the sugar high” from tax reform. In fact. this expansion period has lasted 9.5 years so far, and Strauss says if the economy continues to expand through the middle of the year, we will set a new record for the longest expansion.
Strauss explained that the path of the current recovery is restrained when compared to the deep recession recovery cycles of the past.
He also believes that the probability of a recession is the next six months has eased. He explained that economies do not just run out of steam, but rather, “you get a negative economic shock that causes people to forestall making investment or making a purchase.”
Given the recent volatility of the stock market, Strauss spent a few minutes explaining why economists care about what happens in the stock market. “It is a forward indicator. You buy a stock because of its future value.” He added that the stock market is an over-predictor of recession, so is not the best indicator of when one will occur.
Other things Strauss expects to see this year and beyond include:
- Employment will rise moderately and the unemployment rate will continue to remain low through 2021. Unemployment numbers have not been this low since 1969. “Unemployment will remain low through 2021 at below 4%,” he said. In addition, business will be bidding for the talent they need and we will see wages rising.
- Inflation will be at the Federal Reserve’s inflation target of 2% through 2021. The Blue Chip says inflation will remain flat too.
- Vehicle sales are expected to be lower this year and into 2020.
- Trucking activity should remain solid.
- Manufacturing output is expected to increase at a slower pace.
- There will be a gradual recovery in the housing sector.
- Industrial production is forecast to rise at a slower pace this year and moderate further in 2020.
- The Federal Funds Rate is expected to be at the top of the neutral range by the end of the year and then move slightly above neutral in 2020 and 2021.
In essence, Strauss said he is looking at a very decent year, with no real risk for U.S. economy, and he next year at HDAD he expects to be celebrating the fact that we have had a record number of years of expansion.
Looking out further, Strauss said 2020 could be suggestive of the economy going into recession. “But I am not saying at the end of 2020 that we will see the wheels of cart fall off.”