WACO, Texas – Over the past year, the U.S. economy has been generating net new jobs at a rate which has finally led to a meaningful reduction in unemployment, which stood at 5.8 percent in November.
The Perryman Group’s latest short-term projections call for a continuation of this positive trend, with ongoing economic expansion through 2019 (barring an unforeseen major shock). While most areas will likely see improvement over the next five years, expansion will be uneven, both in terms of geography and industry. Here are some of the key patterns affecting economic performance, as well as our latest short-term forecast.
Given the return to growth in the national economy, the Federal Reserve System (Fed) has ended quantitative easing (QE) implemented during the downturn. The point of QE was to inject liquidity into the economy in response to rapidly worsening economic conditions during the recession. As the Fed purchased bonds, dollars were released into the financial system, helping push down interest rates in an effort to stimulate investment and consumption and, hence, help the economy recover.
Between the fall of 2007 and late 2009, the U.S. economy shed almost nine million jobs (from about 138.4 million to 129.7 million). Without QE, the losses would likely have been far worse. It took almost five years to get back to the number of pre-recession jobs from the trough, and without QE it could have been much longer (although monetary policy is not the best tool for this purpose). Recent stability in the economy led to the decision to stop the program. However, the recovery is still not robust enough to risk backing off too far too fast and sending the U.S. backsliding toward another recession. Rather, the Fed is expected to pursue a course toward a slow return to more normal conditions. Monetary conditions remain accommodative, and interest rates are expected to remain low. The success or failure of the Fed in timing its future actions will be a crucial factor in economic growth.
In spite of recent progress, lingering problems stemming from the major job losses during the recession will continue to slow the pace of expansion, particularly in some geographic areas of the United States. Although the job situation has clearly improved, there are still problem areas. The number of unemployed persons stood at 9.1 million in November, with millions more underemployed. In addition, wages have not yet begun to rise in most occupations. Over time, however, slack in the labor market will be absorbed and wages will begin to rise if current patterns persist.
Advances in drilling and recovery techniques (hydraulic fracturing, in particular), together with a high price environment, contributed to a surge in oil exploration and production activity over the past several years. As a result, crude oil and lease condensate production topped levels not seen since the 1980s. The oil industry has been a key driver in business activity and the overall economy, particularly in states with newly recoverable shale and other tight formations such as Texas, North Dakota, New Mexico, Oklahoma, Colorado, Wyoming, Utah, Ohio, West Virginia, and Pennsylvania. For the nation as a whole, lower oil (and, therefore, fuel) prices are linked to higher economic growth. However, recent sharp declines in the price of crude oil will curtail activity if they persist, particularly with regard to exploration and opening new production areas. (The Texas economic forecast will be the topic of an upcoming column, with greater detail on the potential fallout from the oil price decline.)
International uncertainty is still curtailing performance, with the potential for escalation in military conflicts in several regions and financial instability in Russia and parts of the European Union. To the extent that these problems worsen, U.S. economic performance could be affected.
Changes in the domestic political landscape could also affect the economy. The recent elections could lead to changing priorities with potential effects (both positive and negative) for the economy. Other major debates are likely in the areas of immigration and the Affordable Care Act.
On balance, our most recent forecast calls for relatively healthy expansion in the U.S. economy over the 2014 to 2019 time horizon. Real gross product is likely to expand by almost $2.9 trillion to reach $18.9 trillion (a 3.37 percent compound annual rate of growth). More than 12 million net new jobs are expected to be created over the period, and real personal income levels are projected to grow at a 3.53 percent annual pace.
As we move into 2015, the national economy is facing significant challenges. However, the underlying conditions are far better than in the not too distant past. I hope that the coming year brings each of you health, happiness, and prosperity.
Dr. M. Ray Perryman is President and Chief Executive Officer of The Perryman Group (www.perrymangroup.com). He also serves as Institute Distinguished Professor of Economic Theory and Method at the International Institute for Advanced Studies.