The Tax Cut and Jobs Act passed by Congress in late December finally gives the country economic reform we can sink our teeth into, says Â鶹ӳ»´«Ã½ economist Sean Snaith in his latest U.S. Economic Forecast.<\/p>\n
\u201cAfter a steady stream of unfulfilling nothing burgers, Washington, D.C., has finally prepared a \u2018something\u2019 burger: an economic Big Mac known as the Tax Cut and Jobs Act,\u201d Snaith said, adding that the special sauce of regulatory reform will help feed what has been an anemic economic recovery.<\/p>\n
The new law lowers individual tax rates, increases standard deductions and expands the Child Tax Credit while also lowering corporate tax rates, which had been the highest among industrialized nations.<\/p>\n
\u201cThe collective impact of this tax law will be significant, as it will raise the take-home pay of workers and reduce the incentive of companies to move offshore to avoid the high corporate tax rates in the U.S.,\u201d Snaith said, noting that it also provides an incentive to bring back the hundreds of billions of dollars U.S. firms have been holding overseas, which can be used to invest in their domestic operations.<\/p>\n
The first quarter forecast produced by the Â鶹ӳ»´«Ã½ Institute for Economic Competitiveness expects average monthly payroll job growth, which has been decelerating the past several years, to get a boost from tax reform over the next several years.<\/p>\n
To date, policy and political uncertainty, regulatory burden and tepid economic growth have hindered payroll job growth, which slowed to 1.6 percent in 2017, but Snaith said it is expected to pick up in 2018-2020 to average 1.9 percent before easing to 1.1 percent in 2021.<\/p>\n
The foreign sector will continue to be a drag on U.S. growth. The recent weakening of the dollar will boost exports and depress imports, but faster Gross Domestic Product growth and higher interest rates will allow the dollar to rise. As a result, net exports will continue to fall through 2021. Uncertainty over trade deals and tariffs continue to cast a shadow over this sector.<\/p>\n
After raising interest rates in December, the forecast calls for the Federal Reserve to enact the next 25 basis point hike in March. Stronger economic growth and higher inflation from the Trump administration policies will prompt a faster pace of hikes over the next three years, with the federal funds rate hitting 4.25 percent by the end of the fourth quarter of 2021.<\/p>\n
Real GDP growth hit 2.3 percent in 2017 but is expected to accelerate to 3.2 percent in 2018 and rise to 3.5 percent in 2019 before easing to 2.9 percent in 2020 and 2.4 percent in 2021, as the Federal Reserve tightens interest rates and gradually shrinks its balance sheet.<\/p>\n
As the housing market continues to recover, Snaith said he expects it to slowly improve through 2021 in the face of rising interest rates, and housing starts will rise from 1.35 million in 2018 to 1.72 million in 2021.<\/p>\n
The headline unemployment rate, which is based on the number of people who say they do not have a job and are looking for work, is expected to decline to 3.4 percent in late 2020. Job growth will be sufficient to keep up with labor force growth through the end of the forecast horizon. \u201cThe economy is closing in on full employment,\u201d Snaith says, \u201cand the faster wage growth that comes with it.\u201d<\/p>\n
Headline Consumer Price Index inflation, which measures how much inflation is occurring in the economy, will accelerate in 2018, pushing the Fed to continue raising interest rates and shrink its balance sheet. Core CPI inflation will average 2.6 percent during 2018-2021.<\/p>\n