More Balanced Economic Growth

Authors

Eric Thompson, University of Nebraska-LincolnFollow

Date of this Version

6-3-2017

Citation

Business in Nebraska, Volume 71, No. 719, June 2017

Comments

Copyright 2017 University of Nebraska, Bureau of Business Research

Abstract

There has been a re-balancing of both global and domestic economic growth during 2017. Globally, growth is improving in Europe and China, yielding more balanced international growth. Within the United States, growth also has become more balanced across industries. As in past years, the service sector, supported by growth in employment and real wages, has grown steadily with increases in retail trade, business services, personal services and construction activity. However, in recent months, there also has been improved growth in the industrial sector, with a rebound in the energy sector, and more business investment in capital equipment. The result is more balanced economic growth. Despite this rebalancing, economic growth remains moderate rather than strong, for at least two reasons. The first reason is weak growth in the labor force. Most fundamentally, the pace of job growth is slowed by the ongoing retirement of “baby boom” generation workers. In addition, the reserve of underutilized workers in the United States economy continues to shrink as the labor market completes its recovery from the Great Recession of 2007 through 2009. Weak growth in the labor force limits growth in gross domestic product. Public policy is the second reason for moderate economic growth. The United States economy faces the need to reform: government regulation, the tax code, federal entitlement programs and the legal immigration system. Only limited progress is being made on these key reforms. The Trump Administration has raised expectations that it will reduce environmental, labor market and financial regulations over time. These expectations have helped stimulate business investment. However, the prospects for tax reform remain uncertain, given that Congress and the White House have not yet developed a unified approach. There is even greater ambiguity regarding reform in the major entitlement programs of Medicare and Social Security, given that the Administration has not embraced the need for reform. Finally, steps to reform the legal immigration system have primarily focused on reducing legal immigration, which will compound the problem of a slow growing labor force. While it is still possible that policy changes over the next few years will provide a significant boost to economic growth, the ultimate contribution remains unclear at this time. The current outlook therefore, is for moderate economic growth from 2017 through 2019. Real GDP is expected to grow by 2.5% in 2017, and 2.6% in 2018 and 2019. Job growth will follow a different pattern, falling as the reserve of discouraged workers dwindles. The rate job growth will fall to 1.5% in 2017, 1.3% in 2018 and 1.2% in 2019. The inflation rate will be 2.3% in 2017, somewhat above the U.S. Federal Reserve Bank’s target rate of 2%, as energy prices rebound from very low levels. However, inflation will fall back to 2.0% in 2018 and 2019. The Federal Reserve will periodically raise short-term interest rates but long-term rates will remain low.