The United States economy has been performing well, setting the stage for future growth. Much of the slack in the labor market has been eliminated.
Total nonfarm payroll employment rose by 261,000 in October, and the unemployment rate was down to 4.1 percent, according to the latest figures from the U.S. Bureau of Labor Statistics. The number of unemployed people was 6.5 million, down 1.1 million since January 2017. About 1.6 million of the unemployed had been jobless for 27 weeks or more.
However, there remains room for additional strengthening.
The number of people working part time for economic reasons (they would have preferred full-time work but were working part time because their hours had been cut or because they were unable to find full-time jobs) declined by 369,000, but was still fairly high at 4.8 million as of October.
In addition, 1.5 million were marginally attached to the labor force, meaning that they wanted and were available for work and had looked for a job sometime in the prior 12 months, but were not counted as unemployed because they had not searched for work in the four weeks preceding the survey.
The labor force participation rate also remained low by historical standards at 62.7 percent.
The Federal Reserve continues to normalize monetary policy and has begun reducing assets purchased during the global financial crisis and later quantitative easing to help the U.S. economy recover from the Great Recession.
If left in place too long, extremely low interest rates and accommodative monetary policy would lead to inflation and other threats to the economy. Reducing the balance sheet will test the economy and financial system.
When the Fed stops reinvesting in securities, liquidity is reduced. It is a necessary step, because the Fed has several trillion dollars more in assets than it needs on a long-term basis.
The goal is to gradually change monetary policy in hopes that the economy continues to expand and hiring is encouraged, since maximum employment is one of the Fed’s statutory mandates. However, the other component of the Fed’s role is to keep inflation in check, and an overheated economy can cause price escalation.
Balancing these two goals will involve careful monitoring of economic data, and future adjustments will be based on evolving conditions. Normalization is essential to long-term growth, and it is a positive sign that the Federal Reserve is working in that direction.
As the U.S. population ages and fewer people are in the labor force, workforce growth may become a constraint in some segments of the economy. In addition, the composition of the workforce will change dramatically over the next several decades.
As I have noted in prior columns, Hispanics will become ever more essential in the U.S. workforce, accounting for most of the growth in the labor force in the future.
On balance, The Perryman Group’s forecast for the U.S. economy indicates expansion in real gross product at a 2.84 percent compound annual rate through 2040, with real gross product almost doubling by the end of the forecast horizon. We project employment gains at a 1.42 percent annual pace over the period, resulting in the addition of about 58.1 million jobs over the period.
That is not to say that there are not risks on the horizon.
Obviously, global tensions are high and could easily escalate to the point that they disrupt business activity. Attention tends to focus on North Korea and several Middle Eastern countries, but risks are also prevalent in several parts of Central and South America, and the future political alignment of Europe is also in flux.
Other uncertainties surround potential cyberattacks of various kinds, which could impact the financial and payments systems, the power grid, logistics networks and other vital components of the complex web of vulnerable components which drive the modern economy.
The elimination of key trade agreements and uneconomic immigration policies and actions could also dampen growth. While pending tax cuts will likely provide a modest stimulus, the hasty manner in which they were drafted and the fact that they will alter asset values across a broad spectrum could well lead to unintended consequences and instability.
Nevertheless, current economic strength and strong underlying institutions will help to deal with both short-term issues and long-term challenges.
While business cycles are inevitable and the current expansion has been with us for a while, the overall pattern for the nation in the coming decades is likely to be expansionary.
M. Ray Perryman is president and chief executive officer of The Perryman Group (perrymangroup.com). He also is Institute Distinguished Professor of Economic Theory and Method at the International Institute for Advanced Studies.