Sep 28, 2018

Bruce Yandle’s Economic Forecast: Very Sunny with a Few Dark Clouds

Krista Chavez Marketing Associate, Chad Reese Former Managing Editor

Last Thursday, Mercatus Center scholar and economist Bruce Yandle gave his quarterly economic update briefing on Capitol Hill. He predicted a “very sunny” economic weather report with “a few clouds – and some very dark clouds”

Points of Optimism

Dr. Yandle pointed to three “sunny” indicators for economic growth in the next year—levels of GDP growth, GDP per capita, and unemployment. Since Q3 in 2015, there has been a gradual increase in real GDP growth, a decrease in unemployment, and an increase in GDP per capita--all encouraging indicators for the economy.

Areas of Concern

While Dr. Yandle considered the economy quite sunny, he focused his report on the “few clouds” that could have a significant impact on economic stability. The three dark clouds floating over the economy, in Dr. Yandle’s view, are the trade war, Federal Reserve interest rate hikes, and immigration.

Trade Policy

Dr. Yandle expressed concern that the trade war will make consumers pessimistic about the economy: “If the trade wars continue at the current level and continue for two years, subtract 0.6 percentage points from world GDP... it means the world will be poorer in two years,” he said.

Monetary Policy

Dr. Yandle expected the Federal Reserve to raise interest rates this quarter; however, he thinks this could accidentally trigger stagnation in the economy. He said, [The Federal Reserve has] a charge: to maintain the stability and growth of the American economy... (and) they run the risk of hitting the economy in the head.”

Relying on the “old-fashioned logic” that the Fed moves interest rates as inflation increases, Dr. Yandle anticipated that interest rates will rise by half of a percentage point by the end of the year and by that much again around June 2019.

Immigration

Immigration was Dr. Yandle’s third area of concern. “It’s going to be workforce growth and productivity growth that will determine the strength of the future economy,” he declared.

According to the US Census Bureau, the domestic population aged 55 and over is increasing. Dr. Yandle predicted that this will contribute to lower levels of GDP growth overall because older workers tend to be more risk-averse and less mobile.

Dr. Yandle also pointed out that immigration contributes positively to overall happiness. Immigrants come to the US in search of a better life, and when they find it, this increases the overall happiness of the country.

State Spotlight: Illinois

Each quarter, Dr. Yandle and his team select one state and examine its overall health and outlook for the future. For this report, they focused on Illinois, a state facing serious financial challenges.

Illinois’s labor force size and participation rate both decreased in 2017, its unemployment rate remains above the national average, and personal income grew below the national average. Additionally, the state’s debt looms at 19.08 percent of its GDP, mostly because of pension, healthcare, and education spending.

Despite these concerns, Dr. Yandle emphasized some positive factors in the state’s overall economy. It added 18,100 jobs to the economy in June 2018, and the Supreme Court’s Janus v. American Federation of State, County, and Municipal Employees case allows individuals to decline union membership without being forced to pay union dues. Additionally, Illinois has a high school graduation rate of 85.5 percent, which is above the national average.

Conclusion

Overall, GDP and per capita GDP growth, plus encouraging unemployment statistics, provide a positive outlook for the nation’s economy in this quarter and in the next year. However, Dr. Yandle warned against the potential effects of a trade war, an increase in interest rates, and the anti-immigration trend—problems that could cause the “sunny” outlook to darken. 

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