Economic Outlook of the US Economy Term Paper

Summary



Economic forecasting refers to the process of trying to predict the future state of the economy through a series of different indicators. This process helps to understand the probable future of a nation’s economy and for policymaking to help promote economic growth. When developing an economic forecast, various macroeconomic factors/conditions are taken into consideration. This paper provides an economic forecast of the U.S. economy based on recent economic indicators in 2017 and 2018.



Based on seasonally adjusted annual rates in the fourth quarter of 2017, the gross domestic product growth rate is expected to increase moderately in the first quarter of 2018. As shown in these indicators and based on recent macroeconomic conditions, GDP growth rate in the first quarter of this year is expected to be approximately 2.8%. Additionally, GDP growth rate will continue to increase moderately in the second half of the year to exceed 3.0%.



In light of the increase in Consumer Price Index in the fourth quarter of 2017, inflation rates in the United States are expected to grow by 2.1% in the first quarter of this year. This growth in inflation rates will continue to the second quarter of the year by approximately 2.4%. This is because of the 0.2% and 2.4% increase in consumer prices in February and March respectively. Similarly, core inflation rates, which have been rising since the fourth quarter of 2017, are also expected to grow by 2.1% in the first quarter of 2018. Due to increase in core consumer prices and increase in food and energy prices, core inflation rates will increase by 2.3% in the second quarter of 2018. Food prices in the last quarter of 2017 increased by 0.1% while energy prices increased by 28.2%. It is expected that food prices will increase by approximately 0.5% and energy prices will increase by nearly 15% in the first quarter of this year. However, a marginal decrease is expected in food prices and energy prices in the second half of the year because of volatility of food and energy. The decline in energy prices will largely be influenced by the decrease in the cost of gasoline.



In the last quarter of 2017, United States unemployment rates stood at 4.1% for three consecutive months of this quarter. Unemployment rates in the country are expected to remain the same i.e. 4.1% in the first and second quarter of the year. On the other hand, the rate of underemployment will remain at 8.2% due to near full employment in the U.S. labor market.

Given the spiraling U.S. debt and current macroeconomic conditions, asset prices will continue to be high in the first and second quarter of this year. During the same period, the business cycle will become relatively stronger because of increased interest rates by the Fed. This will also be influenced by the establishment of policies that improve business fundamentals to enhance growth in the stock market and the overall U.S. economy. The U.S. dollar has significantly underperformed against other major world currencies, but value of the currency is expected to strengthen in the first and second quarter of 2018 due to increased interest rates.



The U.S. has recently adopted fiscal and monetary policies that have significant implications on the economy, especially in terms of boosting economic growth. At the beginning of 2018, the U.S. Congress approved fiscal policy that lift government spending in 2018 and 2019. At the same time, the Fed established interest policy that enables increase in interest rates and increased government spending. These policies would boost economic activity in the country and promote economic growth.



Economic Forecast of the U.S. Economy



Economic forecasting is a term that is used to refer to the process of trying to predict the future state of the economy through a series of different indicators. Economic forecasting is not only vital for understanding the probable future of the economy, but is also utilized by policymakers in making policy decisions that seek to promote future economic growth. Some of the most important concepts included in economic forecasting include future gross domestic product growth rate, industrial production, inflation rates, consumer confidence, interest rates, and unemployment rates. Economic forecasts are prepared for different time periods such as quarterly or annually depending on the specific goals of the forecasts. Therefore, economic forecasting is an important process towards enhancing understanding of macroeconomic conditions in a particular country. This paper provides an economic forecast of the U.S. economy using different indicators for the first and second quarter of 2018. The various indicators are utilized to predict the performance of the United States economy in 2018. The forecast is prepared based on indicators obtained from the course web page to demonstrate understanding of various macroeconomic concepts learned in this course. The forecast will also include a discussion of the impact of adopted monetary policy and fiscal policy on the United States economy.



Forecast of Gross Domestic Product



Gross domestic product growth rate is one of the most important aspects for predicting economic growth and development. Gross domestic product (GDP) is the foundation with which governments and businesses make decisions regarding spending, hiring, investments, and policies that affect aggregate economic activity in a country. GDP is a term that refers to monetary measure of the market value of all complete goods and services created with a specific time period either quarterly or annually. It’s regarded as the best way for evaluating a country’s economy since its total value of all products and services produced by businesses and individuals within the country. Therefore, this macroeconomic concept is one of the basic indicators used to examine the status and health of a nation’s economy.



Based on seasonally adjusted annual rates in the fourth quarter of 2017, the gross domestic product growth rate is expected to increase moderately in the first quarter of 2018. The prices of goods and services purchased by residents in the United States increased by 2.5% in the fourth quarter of 2017. In this regard, its expected that these prices of goods and services will continue to increase in the first quarter of 2018 to approximately 3.0%. The expected increase in prices of goods and services is also accompanied by the anticipated increase in food and energy prices. In the fourth quarter of 2017, food prices increased by 0.1% while energy prices increased by 28.2%. A minimal increased of approximately 0.5% and 15.0% in the prices of food and energy is expected in the first quarter of 2018. The projected growth in the gross domestic product in the U.S. in the first quarter of 2018 will also be fueled by the ongoing growth in consumer spending, which has propelled businesses to add capacity in response to the growth. Moreover, the near full employment of the United States economy as at the last quarter of 2017 will influence the moderate acceleration of GDP in the first quarter of 2018.



In the second quarter of 2018, gross domestic product will continue to grow moderately. The expected continued growth rate of GDP is influenced by the macroeconomic conditions in the first quarter of the year. Even though the first quarter of 2018 could be relatively sluggish because of a seasonal quirk, business and consumer confidence continues to be strong while the labor market is almost full employment. GDP growth in the second quarter of 2018 will also be fueled by the impact of $1.5 trillion income tax package on households as established by the Trump Administration. This tax effects, which were enacted in January, will start to have significant impacts on the paychecks of many households in the second quarter of this year. The increase in GDP growth rate during this period will contribute to annual economic growth because of increased government spending, strong business and consumer confidence, increased consumer spending, and lower individual and corporate taxes.



According to Bachman & Majumdar (2018), GDP growth rate in the second quarter of 2018 could increase by approximately 3.0% for several reasons as shown in Figure 1. First, the near full employment of the labor market implies that impact will be experienced in higher inflation instead of more real activity. Secondly, interest rates during this period are likely to increase faster than expected because of increased demand, which will relatively restrain demand for debt-financing products and services like cars and houses. Third, capital costs will have relatively minimal impacts on holding back investments since they have been low for a long period of time. Net exports and inventory spending, which were sluggish in the fourth quarter of 2018 are expected to increase in the second quarter of 2018 after rebounding in the first quarter of the year. The Bureau of Economic analysis reports that net exports bounced back to be a positive contributor to GDP growth in…