November 16, 2017
In Donald Trump's first three quarters as president the U.S. economy has averaged a solid 2.4 percent growth rate, still well short of the 4 percent he promised as a candidate and less than the 3 percent his first federal budget proposal assumed.
University of Michigan economists are projecting that overall economic output growth, as measured by real gross domestic product, will rise from an average of 1.5 percent last year to 2.2 percent during 2017, 2.5 percent in 2018 and 2.1 percent in 2019.
The forecast, produced annually by the Research Seminar in Quantitative Economics in the Department of Economics since 1952, was prepared by U-M economists Daniil Manaenkov, Aditi Thapar and Owen Nie.
"The Trump Administration has yet to leave a lasting mark on the fiscal landscape," Manaenkov said.
Where Trump might leave his mark in the coming year is in tax reform, which could also have significant implications for government spending, the economists say. The U-M forecast assumes $150 billion in corporate and personal tax cuts annually, which will expand the deficit.
"The much-hyped tax reform being debated has the potential to reshape the nation's tax code in a substantial way for the first time since 1986," Manaenkov said. "We believe that federal deficits are going up, but by how much?"
Other key economic measures and the forecast based on the Michigan Quarterly Econometric Model of the U.S. Economy include:
• Jobs: The national economy will add 3.7 million jobs over the next two years—2 million jobs in 2018 and another 1.7 million during 2019.
• Unemployment rate: The annual unemployment rate will continue to drift down from an average of 4.4 percent this year to 4.2 percent in 2018 and 4.1 percent in 2019.
• Inflation: Extending the current weakness in inflation, core Consumer Price Index inflation is projected to register 1.7 percent in 2018 and then rise to 2.1 percent in 2019.
U-M forecasters expect the Fed to raise interest rates at its December meeting.
"The recent weakness in core inflation should worry the Federal Reserve," Thapar said. "The Fed has openly admitted that it does not completely understand what is driving the weakness in inflation, but appears resolved to ignore it for now and maintain the pace of rate tightening."
• Housing market: Construction of new homes will rise to 1.2 million this year, driven primarily by single-family home starts. As rebuilding in the South after hurricanes Harvey and Irma gains steam, 2018 should see a moderate rebound of more than 70,000 new housing starts followed by another slow year in 2019.
Sales of existing single-family homes are expected to rise by about 50,000 units to a total of 4.88 million in 2017. Sales growth stalls in 2018 as mortgage rates increase, but is expected to rise to 4.97 million units in 2019.
• Disposable income: Growth in real disposable income picks up the pace from 1.4 percent in 2017 to 2.6 percent in 2018 and 3.2 percent in 2019, as tax cuts are phased in and wage growth picks up. Consumption grows at a steady pace of 2.5-2.7 percent in 2018 and 2019.
• Light vehicle sales: Sales of light vehicles will slow to 17.1 million units in 2017, down from 17.5 million sold last year, and remain virtually flat in 2018 and 2019.
• Treasuries: By the end of 2018, the three-month Treasury bill rate will rise to 1.6 percent, the 10-year Treasury bond yield will reach 3.0 percent, and the 30-year mortgage rate will reach 4.5 percent.