December 10, 2017
A Forecast for 2018
This week, the research center where I am employed released its 2018 economic forecast. As with most recent years, this forecast has mixed projections. Importantly, this forecast coincides with the 10th anniversary of the start of the Great Recession, so it is worth explaining how much of its effects linger and perhaps what caused the lingering effects.
Our forecast for 2018 in the US and Indiana is the best of the post-recession years, but it isn’t good. We expect GDP growth for Indiana and the nation as a whole will rise only slightly above 2 percent. That is a third slower than the post-World War II rate of nearly 3.5 percent. If this growth rate persists, it will mark a profound cultural shift in the expectations of American families. For the better part of two centuries, economic growth has doubled the standard of living of Americans every 25 to 35 years. At 2 percent growth, the average person will experience those gains over 70 or so years. That will feel like a zero-growth economy, and will spawn political and cultural problems for which we are unprepared.
The causes for this slow growth are uncertain. Serious research finds effects as diverse as regulatory overreach, excessive public debt, the end of high-impact innovations and ineffective policy interventions that accompanied the Great Recession. There is some truth to all these concerns, but I increasingly find the latter to be the most credible. There are two ways to think about the issue.
The first of these is Paul Krugman’s concern that too little stimulus took place in the early days of the recession. I might argue that rather than too little, the stimulus efforts were misdirected into unproductive efforts. The New Deal mostly paid people to work, the 2009 Stimulus Bill mostly paid folks not to work. The microeconomics of these programs matter.
Second, the Federal Reserve began paying interest on excess banking reserves in 2009. Excess reserves, or the money that banks don’t loan, had hovered near zero for decades. It jumped from zero to $2.5 trillion in three years. Today it hovers above $2.1 trillion. These are dollars the Federal Reserve is paying banks not to lend. This could conceivably have cost the US economy 1 percent of growth per year for each of the past eight years. Again, the microeconomics of public policy matters, and that leads us back to some musings about the future.
The best news about this year’s forecast is that the most recent data is largely positive. Growth in 2017 has been unusually strong, and there are signs that 4th quarter growth is broad-based and higher than normal. While I do not believe the tax cuts will have as large an impact as supporters suggest, they will boost growth, maybe by as much as 0.4 percent. They won’t pay for themselves, but with growth stuck near neutral, it is time to take some policy risks.
Across the Midwest, growth will be fairly modest, except in Illinois, where growth in GDP may not exceed 1 percent for the next half decade. I think the problems in Illinois are home grown, and similar to those in California where there are rumblings of a downturn. The problem for us is that the size of these economies will influence the rest of us.
One inevitable worry for the Midwest is manufacturing employment. Today, manufacturing production is booming and the nation hovers right at the all-time record production of goods (in inflation-adjusted dollars). We have also experienced a significant period of employment growth in the years after the Great Recession. However, much of that simply reflects a return to trend. We are now near the long-term manufacturing employment trend, at the same time there is evidence that manufacturing productivity is growing. That means an overall slowing of manufacturing employment in the near future. Maybe not in 2018, but soon we’ll be back on a 70-year trend. It is time to think hard about this.
Finally, while Indiana will see growth like the nation as a whole, it will be very uneven. Some areas, especially larger metropolitan areas, will enjoy another year of strong population and economic growth. However, between half and two-thirds of Indiana’s counties will lose population this year. Several large cities should expect to see their economy weakened as well.
As we look towards the future, while glancing back at the start of the Great Recession, a few facts loom clearly over us. Many American communities and families are well past the Great Recession. These people and places are thriving and moving quickly into an optimistic 21st century economy. Far too many families and communities remain idle or in decline. Part of this is due to a lack of adaptability and introspection, but part is also due to factors beyond their control. It would be good if 2018 was a year of economic convergence and growth.
About the Author
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