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UM economists: Recession is not imminent

Breana Noble
The Detroit News

Economists at the University of Michigan predict that the next recession could be farther off than some expect.

The annual forecast, produced by the Research Seminar in Quantitative Economics since 1959 and released Thursday, estimates 2018 will end with economic expansion of 2.9 percent. Positive effects of federal spending and tax cuts, however, are expected to diminish beginning in 2019 and fade out come 2020.

Economists at the University of Michigan predict that the next recession could be farther off than some expect.

The economists projected real gross domestic product will see a solid 2.7 percent increase in 2019, then drop to 1.9 percent in 2020. With surveys of economists pointing to 2020 as when they expect the U.S. economy to contract again, the university's report provides an optimistic tone.

"We are almost certain we will be wrong when the time passes," said Daniil Manaenkov, an economist at the university. "This report should be seen as the best summary of what is happening in the moment. There's not much indication that the recession is imminent. The economy is tapering, after having benefited from fiscal stimulus late in the expansion phase."

Manaenkov said economic indicators suggest there is nothing to worry about now, but over the next one or two years, that could change as fiscal and monetary benefits dry up.

He also predicted a trade war with China is not expected to dramatically hurt GDP. The forecast assumes tariffs on China to increase from 10 percent to 25 percent come January. Manaenkov said he expects businesses to import heavily during the final quarter of this year to have stock on hand as supply chains adapt.

"Ten percent may be somewhat manageable," Manaenkov said. "Businesses bargain with suppliers, crank up transfers and pass on costs a little bit to consumers. Twenty-five percent, on the other hand, that's when they seek new suppliers or work with a supplier so that he or she ships to Taiwan and then ships to the U.S. to avoid tariffs. In the short term, there are some gyrations, and they basically undo themselves over the course of 2019."

The Michigan Quarterly Econometric Model of the U.S. Economy predicts as the economy slows, so will job growth. But with wages just now beginning to increase, the researchers expect unemployment to continue to diminish.

They predicted unemployment to drop from an average 3.9 percent this year to 3.5 percent with the addition of 2.3 million jobs in 2019 and to 3.4 percent with the addition of 1.7 million jobs in 2020. That would be the lower unemployment rate since 1953.

"What makes you happy is when you're employed and being compensated a lot," Manaenkov said. "People are working, which is better than not working, but wage growth is fairly weak. I wouldn't call it the best labor market in 50 years. Wage growth is not keeping up with employment."

As employment growth stalls, real disposable income is expected to fall to 2.7 percent in 2019 and 2020. Consumption, though, is expected to grow by 2.6 percent in 2019 and then by 2.2 percent in 2020 as interest rates rise.

Mortgage rates are expected to rise from 5.1 percent in 2019 to 5.3 percent a year later. Existing home sales are expected to decline by about 110,000 units to 4.8 million in 2018 and stay at a similar level for the next two years, though new home sales have slipped from earlier in the year. In September, national new home supply rose to 7.1 months from 4-6 months for the past seven years. Higher supply, the economists said, could mean a slackening market that could slow new home starts.

Light vehicles sales are expected to sell 17.1 million units in 2018, as fleet sales for rentals and commercial vehicles make up for sliding retail sales, Manaenkov said. As interest rates rise and the economy cools, that number is expected to decline to 16.9 million in 2019 and 2020.

The economists said inflation remains near the Federal Reserve's 2-percent target. They estimate the Consumer Price Index to register 2-2.1 percent in 2019-2020, after higher oil prices boosted this year's index to 2.5 percent.