While my views on the appropriate path of policy will be impacted by economic conditions as they unfold during the year, I continue to believe that gradual and patient removals of accommodation will increase the likelihood of extending the economic expansion in the U. History suggests that if the Fed waits too long to remove accommodation at this stage in the economic cycle, excesses and imbalances begin to build, and the Fed ultimately has to play catch-up.
In my judgment, getting behind the curve and then trying to catch up would increase the likelihood of recession in the U. While Dallas Fed economists forecast strong economic growth in 2018, they also expect growth to moderate to 1.75 to 2 percent by 2020. This level of potential GDP growth is lower than we’ve historically been accustomed due to several structural issues discussed below.
While consumer leverage helped fuel GDP growth leading up to 2007, in 2008, it became apparent that the consumer had to deleverage. The corporate tax reform elements of recent tax legislation should help to encourage greater business formation and investment, which should lead to greater productivity and some increase in the growth potential of the U. Ultimately, we believe that growth will return back to trend.
It has taken several years—along with an improving job market—for the consumer to reduce debt relative to their income. Dallas Fed economists believe that the expected near-term boost to GDP needs to be balanced with the concern that debt to GDP is likely to materially increase in the years ahead.
We believe that consumer spending will be strong, owing to a healthy jobs market and the multiyear improvement in household balance sheets. We forecast that headline unemployment will decline from 4.1 percent to approximately 3.6 percent by year end.
GDP will grow at approximately 2.5 to 2.75 percent in 2018.The Federal Open Market Committee (FOMC) in its January meeting decided to leave the federal funds rate unchanged in a range of 125 to 150 basis points. We also expect business investment to be stronger than in 2017, and we believe that improved global growth could also help support economic growth in the U. Our forecast reflects the positive near-term impact of the recent tax legislation. We also expect U-6—a measure of labor slack that tracks the number of unemployed plus “marginally attached workers” (workers who indicate that they would like a job but have stopped looking for one) plus those working part time for economic reasons—to decline from 8.2 percent to well below 8 percent.In our FOMC statement after the meeting, the committee explained that it expects “economic conditions will evolve in a manner that will warrant further gradual increases in the federal funds rate.” The purpose of this essay is to briefly discuss my views regarding economic conditions, the implications for monetary policy and address a few of the fundamental challenges facing the U. It is our view that the bulk of this impact will be felt in 2018 and to a lesser extent in 20. It is the judgment of Dallas Fed economists that current levels of headline unemployment as well as U-6 are indicative of an economy that is either at or has moved past the level of full employment.This research indicates that it would be appropriate for the U. to consider reforms to the current immigration system to more heavily take into account immigrant skills as well as other employment-based criteria. is a leader in many areas versus the rest of the world.Such reforms could help enhance the economic and societal benefits from immigration. Whatever policy decisions are made, it is clear that the resolution of current debates relating to immigration policy has the potential to either supplement or create headwinds for future workforce growth in the U. One potential offset to these demographic trends could be improvements in labor productivity. However, average growth in labor productivity over the past decade has been sluggish at approximately 1.1 percent per year. Labor productivity growth averaged approximately 2 percent from 1977 through 2007. Unfortunately, several studies suggest that skill levels and educational achievement levels of our workforce have lagged other developed countries for the last several years.Despite this optimism, we believe longer-term challenges remain. Addressing these challenges is likely to require fundamental structural reforms and a broader menu of policy actions beyond monetary policy.As I have been discussing for the past two years, technology-enabled disruption means workers increasingly being replaced by technology.As a result, they are likely to see their incomes and productivity decline. Since the Great Recession, the household sector in the U. In 2008, the household sector was historically highly leveraged relative to their incomes.Improving math, reading and science capabilities, improving college readiness and beefing up the availability of skills training for potential workers will likely be essential to improving our workforce productivity, reducing the number of discouraged workers and contributing to higher GDP growth in the U. When assessing the level of debt in the economy, Dallas Fed economists look at debt held by the household sector, the business sector and the U. It was not as apparent because household assets, particularly home prices, were elevated and appeared to support higher leverage. consumer has deleveraged since the Great Recession, business debt as a percentage of GDP has increased, and U. government debt levels have increased substantially. While increased business debt is likely manageable, U. government debt held by the public is now 75 percent of GDP, and the present value of underfunded entitlements is now approximately trillion. There is a legitimate concern that the projected path of U. government debt relative to GDP is unlikely to be sustainable. However, the debt-financed tax cuts included in the legislation are likely to temporarily stimulate demand, with effects that will peak in 2018, and gradually fade in 20.These positions require more than a high school education.Due to technology-enabled disruption, the training levels for these middle-skills positions have intensified over the last several years.