The U.S. economy has been performing well, setting the stage for future growth. Much of the slack in the labor market has been eliminated. Nonfarm payroll employment rose by 261,000 in October and the unemployment rate is down to 4.1 percent. The number of unemployed persons was 6.5 million, down 1.1 million since January. About 1.6 million of the unemployed had been jobless for 27 weeks or more.
Yet there remains room for strengthening. The number of persons employed part-time for economic reasons (individuals who would have preferred full-time employment but worked part-time because their hours had been cut back or they were unable to find full-time jobs) declined by 369,000 but is still high at 4.8 million (as of October). And 1.5 million persons were marginally attached to the labor force, meaning they wanted and were available for work and looked for a job sometime in the prior 12 months but were not counted as unemployed because they had not searched for work in the four weeks preceding the survey. The labor force participation rate also remains low by historical standards at 62.7 percent.
The Federal Reserve continues to normalize monetary policy and has begun reducing assets purchased during the global financial crisis and later quantitative easing to help the U.S. economy recover from the Great Recession. If left in place too long, extremely low interest rates and accommodative monetary policy will lead to inflation and other threats to the economy.
Reducing the balance sheet will test the economy and financial system. When the Fed stops reinvesting in securities, liquidity is reduced. It is a necessary step because the Fed has several trillion more in assets than it needs on a long-term basis. The goal is to gradually change monetary policy in hopes the economy continues to expand. Hiring is encouraged, since maximum employment is a Fed statutory mandate. However, the other component of the Fed’s role is to keep inflation in check. An overheated economy can cause price escalation. Balancing these two goals will involve careful monitoring of economic data and future adjustments. Normalization is essential to long-term growth. It’s a positive sign the Federal Reserve is working in that direction.
As the U.S. population ages and labor force participation continues to decline, workforce growth may become a constraint in some segments of the economy. Composition of the workforce will change dramatically over the next several decades. Hispanics will become an ever more essential aspect of the U.S. workforce, accounting for most of the growth in the labor force in the future.
On balance, The Perryman Group’s forecast for the U.S. economy indicates expansion in real gross product at a 2.84 percent compound annual rate through 2040, with real gross product almost doubling by the end of the forecast horizon. Employment gains at a 1.42 percent annual pace over the period are projected, resulting in the addition of about 58.1 million jobs.
That’s not to say there aren’t risks on the horizon. Global tensions are high and could easily escalate to the point it disrupts business activity. Attention focuses on North Korea and Middle Eastern countries, but risks are also prevalent in several parts of Central and South America. The future political alignment of Europe is also in flux. Other uncertainties involve potential cyberattacks of various kinds, which could impact the financial and payments systems, our power grid, logistics networks and other vital components of the complex web of vulnerable components which drive the modern economy. Elimination of key trade agreements and uneconomic immigration policies could also dampen growth. While pending tax cuts will likely provide a modest stimulus, the hasty manner in which they have been drafted and the fact they will alter asset values across a broad spectrum could well lead to unintended consequences and instability.
Nevertheless, current economic strength and strong underlying institutions will help to deal with both short-term issues and long-term challenges. While business cycles are inevitable and the current expansion has been with us for a while, the overall pattern for the nation in the coming decades is likely to be expansionary.