Economy & Employment Trends in 2018
I used to be in the business of forecasting, but am generally not a fan of the practice. Predictions are usually trivial, wildly wrong or correct-by-accident. But here are some 6 potentially meaningful "breaks" in the global economy that could really matter, IF they materialize.
1) 2018 Looks a Lot Like 2017. This is a boring prediction, but also the safest. We continue to see moderate growth in the United States economy as well as expansion in nearly all major global economies. Net job growth will continue to be positive, with an ongoing improvement in churn (hiring and quits); the share of Americans between the ages of 25 and 54 (prime working age) will approach its pre-Great-Recession level. We'll see a moderate rise in inflation-adjusted pay for middle class Americans but no pickup in productivity growth. Inflation will remain quiescent and the Fed will raise short-term interest rates a little.
2) Productivity Growth Rebounds? If you read my posts on LinkedIn, you probably know that the global economy is in the midst of a major productivity slump. US labor productivity is the lowest it's been since the early 1980s; British per capita GDP growth is the lowest in nearly a century. That's mystifying because it seems all we hear about is major technological innovation coming out of the world's tech hubs. But maybe 2018 will finally be the year innovation breaks out of its Silicon Valley(s) bubble and starts driving change in the real economy. Bonus Semi-Prediction: If this happens, it will be associated with stronger, not weaker, job and pay growth.
3) Inflation Finally Rises. People have been warning us about inflation pressures since 2009, when the Great Recession ended. But despite heavy policy intervention by the world's central banks, inflation remains low in most countries. (There are a few exceptions.) The explanation is pretty simple: since the Great Recession ended, global labor markets have been chock-full of disinflationary slack, limiting wage pressures. But more and more of these labor markets are now getting closer and closer to full employment and overheating. Maybe 2018 will finally be the year that we get a genuine, not illusory, inflation scare.
4) Long-Term Interest Rates Finally Go Up. If you notice a pattern in these scenarios, it's not a coincidence. Over the past decade the global economy has become more pessimistic about long-run real economic growth AND inflation, and that's led to a downward drift in long-term interest rates which hasn't reversed even as the Federal Reserve has raised short-term interest rates. But if #2 and/or #3 materialize, you could see these rates go up as investors regain optimism about the global economy's long-run trajectory and/or become more worried about inflationary pressures.
5) We See a Sell-Off in the Riskier End of Asset Markets. 20 or 30 years ago this would have gone hand-in-hand with #3 - higher risk-free interest rates would lead to a decline in most other asset classes. The equity market is overvalued relative to conventional measures and the premium on high-yield corporate debt is lower than is typical - rarely a permanent state of affairs. (Not to mention the genuinely bubbly corners of financial markets, i.e. BitCoin and other cryptocurrencies.) Given how funky inter-asset correlations have been in recent years, though, maybe we'd get a risky asset sell-off AND a decline in long-term interest rates?
6) The Next Recession Begins. The last two recessions were triggered by asset price sell-offs, so you could imagine scenario #5 turning into an economic downturn. (Though given growing inequality, ordinary Americans have less direct exposure to asset price crashes than they did 10-20 years ago.) You could also imagine the Fed's interest rates braking the economy too aggressively - using monetary policy to calibrate economic growth when the economy is near full employment is never easy. That said, this seems like a fairly unlikely scenario in 2018.