Consensus Economic Forecasts Point Upward
New Year’s resolutions are always frustrating, so we thought we’d compile some New Year’s forecasts instead. If resolutions fall by the wayside, you blame yourself; if economic forecasts don’t bear out, you won’t blame yourself, because they aren’t your predictions, and you won’t hold the forecasters responsible, either, because you won’t remember what they said. It is also probably worth recalling what John Kenneth Galbraith is reported to have said about economic predictions: “Their only purpose is to make astrology look respectable.” That said, here’s a summary of the predictions we’ve found.
The consensus view of economists last year was that both inflation and unemployment would be higher at year’s end. They were wrong on both counts. Inflation has remained stubbornly (and surprisingly) below the Federal Reserve’s targets, and the employment market has been strong. The 148,000 jobs created in December fell well short of expectations, but the number was positive (employers hired more folks than they fired) for the 87th consecutive month, extending what is already the longest period employment growth on record. Most economists expect the positive employment trend to continue this year, with job gains less robust but still healthy.
“The job market is very healthy as 2018 begins,” Stuart Hoffman, an analyst with PNC Financial Services Group, told Business Insider. “The solid economy will add about 140,000 jobs per month this year, well above the pace of the underlying growth in the labor force, so the unemployment rate will decline to 3.7% by year-end 2018.”
There is less certainty in the forecasts for income growth, but there appears to be a growing consensus that the strong wage growth, elusive throughout the recovery will surface this year, as employers compete more aggressively for the workers they need in a growing economy. But some analysts are predicting that employers will choose to compete by increasing benefits rather than by boosting salaries.
GDP Growth. Although the U.S. recovery is entering its ninth year (making it the third-longest in history), most analysts are convinced that it still has room to run. Economists responding to a Wall Street Journal survey put the odds of a recession over the next three years at less than 50 percent. Their consensus forecast calls for GDP growth to average 2.6 percent this year and then fall back to the 2 percent range that has been the (historically, somewhat anemic) norm during this recovery.
“Barring some big disruption like a shooting war with North Korea, a trade war with Mexico, or a constitutional confrontation between President Donald Trump and Congress over the Russia investigation, we’ll see more of the same in 2018.” ─ David Wessel: Director, Hutchins Center on Fiscal and Monetary Policy:
Interest Rate Outlook. The Federal Reserve increased interest rates by a quarter of a point at its December meeting – a move Fed officials had telegraphed clearly in advance. Most analysts expect the Fed to remain on the track policy makers have defined, to raise rates at least three times this year and twice in 2019 reflecting expectations that the economy generally, and the labor market, will remain strong. A change in leadership at the Fed, as Jerome Powell Succeeds Janet Yellen, isn’t expected to bring a change in policy direction.
Mortgage interest rates are heading up – hardly a surprising prediction given the Fed’s anticipated rate increases this year. The consensus forecast puts the 30-year rate around 4.7 percent by the end of this year compared with an average of just over 4 percent in November of 2017. “Not only are mortgage rates higher [than they have been], rates will be at the highest level since 2011,” according to Frank Nothaft, chief economist for CoreLogic, who predicts, “We’re looking at an environment, going forward, where this era of cheap mortgage rates will largely be behind us.”
Tax Reform. The sweeping tax reform legislation enacted at the end of last year colors many of the forecasts for this year, but doesn’t appear to alter them substantially. "Don’t expect to see much impact on either jobs or wages anytime soon from the tax bill," Andrew Chamberlain, chief economist for Glassdoor, wrote in his 2018 forecast.
The consensus view is that tax reductions will have a modestly positive impact on growth over the next two years; long-term, the forecasts are less positive. Ninety percent of the economists responding to the Wall Street Journal survey cited earlier said they expect the tax changes to increase GDP this year and next; but 47 percent say the tax changes will either have no impact, or will weaken growth going forward; 22 percent said the tax bill will increase the risk of a recession beginning by late in 2020.
The biggest concern cited by many analysts, is that the tax cuts will over-stimulate the economy, triggering aggressive rate hikes by the Fed to counter inflationary pressures, a scenario that would “upset the apple cart,” Rajeev Dhawan, director of Georgia State University’s Economic Forecasting Center, and one of the analysts quoted in the WSJ survey, warned.
── Lewis Alexander, chief U.S. economist at Nomura Securities, predicts that tax cuts and increased government expenditures will add 0.7 percent to GDP growth this year, and 0.2 percent in 2019.
── Goldman Sachs analysts have revised their growth forecasts for 2018 and 2019 upward by 0.3 percentage points and 0.2 percentage points to reflect tax reform stimulus.
The trends that have challenged the housing market this year ─ scant inventories and rising prices ─ will continue to plague it this year, industry analysts predict, with a strong economy and solid employment gains providing countervailing positive forces.
Home Sales. Yun, chief economist for the National Association of Realtors (NAR) expects the capping of the mortgage interest deduction, the increase in the standard deduction and limits on the deductibility of state and local property taxes (key features of the tax reform legislation that the NAR opposed) to have a “mildly negative” impact on home sales this year, with strong economic fundamental largely cushioning the blow.
"The strengthening economy, and expectation that more millennials will want to buy, serve as promising signs for solid homebuying demand next year," Yun predicts. But those trends will also exacerbate the pressures created by inventory shortages and rising prices in many markets, he cautions. Markets in which home prices and property taxes are high “will likely feel some impact” from tax changes that have reduced the benefits of home ownership.
Yun’s bottom line: Existing home sales this year will match and may fall slightly below t, the 5.54 million totals expected for 2017, with price increases moderating to an average of around 2 percent for the year.
Rob Dietz, chief economist at the National Association of Home Builders, expects tax reform to put a significant dent in new home sales, producing a year-over-year increase of only about 5 percent, rather than the 10 percent to 15 percent gain industry analysts had been predicting. “The longer-run trends will remain in place but there are going to be transition effects due to tax reform,” Dietz told the Wall Street Journal.
Home Prices. There is no clear consensus on the outlook for home prices. Moody’s Analytics predicts that by the end of 2019, prices will be about 4 percent lower than they would have been absent the tax changes. New construction, if it materializes, would also put a lid on price gains. One survey of housing industry executives calculated a median projected price increase of around 4.1 percent nationwide this year, based on their expectation that housing starts will increase by about 8 percent this year, adding more than 900,000 new homes to the supply.
Others, less optimistic about the construction forecast, think inventory shortages will keep upward pressure on prices. “Since home prices are rising faster than wages, salaries, and inflation, some areas could see potential home buyers compelled to look at renting,” David Blitzer, managing director at S&P Dow Jones Indices, predicts.
Analysts counting on a surge in new construction point to increases in residential construction employment as a positive indicator. Builders added 217,000 workers to their rosters in 2017 compared with 155,000 the year before, putting employment totals in this sector at the highest level in nine hears.
But the NAR’s Yun points out that the 2017 total actually represents “a decelerating trend,” compared with annual gains averaging 284,000 in the previous three years. The increase in construction employment could produce “a little growth” in the housing supply, he says, but it won’t make much of a dent in the historically low inventory level, which reached a new low of 3.4 months in November.