My Report Card on the 2018 Economic Forecast

In December of 2017, I wrote an economic forecast for 2018. I got the stock market prediction right and the job creation forecast wrong.

2017 was a great year for stocks, the SnP 500 up 19.3%. Simply put, I thought that stocks would not do as well for two reasons: Trump's first year, nearly trillion dollar stimulus would not be repeated and after 8 years of recovery it seemed to me that folks had forgotten that the Dow is always just one keystroke away from down. That said, it seemed unlikely that anything catastrophic would hit before year end so I estimated a downturn of only 5% to 10%. It would be tough to land more precisely in the middle of that range, so I'll give myself an A+ on that metric.

I forecast that the job market would slow this year. I'm delighted to be wrong on this score and the economy created a stunning (particularly for 99 months into a recovery) 2,638,000 jobs. Mostly I was bitten by the wrong assumption about labor force participation rate.

Labor force participation rate (LFPR) rose 0.4% during 2018. In the last decade it has fallen closer to an average of 0.4% and had only once in the last decade risen more during the prior twelve months. If LFPR had been flat, the economy would have created 2 million jobs; if it had fallen by 0.4% as it has during the last eight plus years of the recovery, the economy would have created only 1.3 million jobs rather than 2.6 million. That's pretty close to my forecast of 1 million. (No, I don't recall why I failed to provide a range for the job creation as I did for the other two forecasts.)

And of course my assuming that the unemployment rate would rise by a couple of tenths of a point rather than fall by a couple of tenths compounded by forecasting error as well. Had the unemployment rate finished the year at 4.1% instead of 3.9%, job creation would have been lower by about 300k, which - combined with a typical fall in labor force participation rate - would have meant that I'd had hit my one million jobs created as precisely as I'd hit the SnP 500 forecast. But I didn't. 

This job market is amazing and I'm not embarrassed to have assumed that it would become more normal in 2018. That seemed reasonable. Again, given what it means for household incomes and wealth creation, I'm delighted that job creation continues to be so strong. 99 months of uninterrupted job creation is more than double the old record of 46 months set in the late 1980s (and triple the late 90s dot-com boom of 33 months). This is a fabulous way to miss a jobs forecast. Creating 2.6 million jobs with the unemployment rate under 3% is a wonderful kind of madness.

My forecast was good for the economic metric that was bad (the stock market) and was bad for the metric that was good (the job market). I'm sure that means something but I'm not sure what.

We're Getting Older, Fewer are Working and GDP Growth is Slowing: Next Decade's Economy in 4 Simple Graphs

In October, the Bureau of Labor Statistics released a report forecasting some key numbers for the next decade. You can find it here.

Here in simple graphs is the story it tells. The punchline is that the U.S. is getting old and GDP growth is slowing.

First, population growth will slow. Babies and immigrants will be coming into the country at a slower rate.

As population growth slows, the population will get older. The percentage of the workforce 55 and older will continue to rise.

People 55 and older are less likely to work than people 25 to 55. So, as the population becomes older, labor force participation rate drops.

Finally, the BLS is projecting increases in productivity. That partly offsets a drop in population growth. Nonetheless, given a smaller portion of Americans will be working, GDP growth will be up higher than last decade (a period that included the devastating Great Recession) but lower than the decade before that (and what it was most of last century).

Demographics is destiny. Baby boomers were at their peak working years 1996 to 2006 and thanks to babies and immigrants (and the babies of immigrants) population growth was robust. Over the next decade that changes and with it will come a change in economic growth.