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US Economic Forecast Bright, but Storms Could Develop

The U.S. economy is experiencing one of the longest expansions on record, but the scars left on the country’s financial system by the Great Recession, as well as challenges from globalization and the impact of automation, are being seen across the country, according to a new report from the Organization for Economic Cooperation & Development (OECD).

The OECD’s latest “Economic Survey of the United States” portrays a strong near-term outlook, with solid private consumption driven by a strong job market and high levels of consumer confidence. Against this foundation, gross domestic product (GDP) growth is set to increase 2.9% in 2018 and 2.8% in 2019.

The survey notes that the recent U.S. tax reform combined with higher public spending ceilings in 2018 and 2019 will provide a fiscal stimulus of around 1 percent of GDP in both years, “representing a sizeable short-term boost to growth.” The report said government actions to reduce regulatory burdens should also help foster a strong business environment.

The IHS Markit June U.S. Economic Forecast Flash paints a similar but nuanced picture.

In the report, chief IHS Markit U.S. Economist Joel Prakken and executive directors Patrick Newport and Ben Herzon write that greater domestic demand is being choked off by a stronger dollar.

They noted that first-quarter GDP growth was revised down 0.1% to 2.2%, in the Bureau of Economic Analysis’ second estimate, “a sharp but temporary downshift from the approximately 3 percent growth over most of the previous year.” The economists said fresh data has caused them to raise their forecast of second-quarter GDP growth by a full percentage point to 4.1%.

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“The main contributors to this markup were two reports: one on the trade balance and the other on personal consumption expenditures, both for April, and each indicating much firmer momentum for output early in the second quarter,” the Economic Flash report said.

IHS Markit’s forecast for the second half of this year stays at about 3 percent, implying 3.1% GDP growth for 2018.

“After this year, GDP growth slows in our forecast,” the report noted. “While equity values jump off and remain higher in this month’s forecast, so too does the dollar, as concern for conditions in Europe have redirected international capital flows into dollar-denominated assets. Furthermore, the U.S. withdrawal from the Iran nuclear deal and the implied threat of renewed sanctions, combined with other supply concerns, has raised oil prices above our prior forecast. Over the next two years, we forecast annual GDP growth of 2.8% and 1.8%, respectively.”

The OEDC report also warns of tougher times ahead, as “risks to the outlook remain sizable.” It said emerging interest rate differentials between the U.S. and other major currencies could contribute to an appreciation of the dollar, while rising trade tensions with key partners also threaten to disrupt global supply chains and dent growth and long-term fiscal sustainability remains a concern.

“The U.S. economic recovery and expansion has been remarkable and appears set to continue for the coming two years,” OECD secretary-general Angel Gurría said. “But there are also some serious risks on the horizon, including trade policy, that could threaten much-needed growth, both here in the U.S. and in many other OECD countries. Further policy reforms are needed to sustain the expansion and ensure that all Americans benefit from stronger and more sustainable growth.”

While Americans appear to be doing well on average in comparison to other OECD countries, job losses have become more persistent in areas hit by structural shocks, especially in the industrial heartland, the OECD said. This has created areas of high unemployment, non-participation in the labor force and poverty.

The survey cited declining participation of prime age workers compared to other OECD countries as a concern. It noted that while the participation rate of women has recovered somewhat, “many young men with lower educational attainment remain at the fringes of the labor market.”

“The increase in automation of tasks with robots and Artificial Intelligence will bring about many benefits, but it will also lead to job losses and wage pressures,” the report noted, adding that “mitigating these effects will require stronger policies and early interventions to help workers acquire new skills and take advantage of new opportunities that will be created, before they’re left behind.”