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US economy poised for steady growth

ANN ARBOR—The annual unemployment rate will remain below 5 percent next year as the U.S. labor market continues to tighten, say economists at the University of Michigan.

The national economy will add 3.7 million jobs over the next two years—2 million jobs in 2017 and another 1.7 million during 2018—slowing from the 2.8 million jobs created in each of the past two years, according to an annual forecast by Gabriel Ehrlich, Daniil Manaenkov, Michael McWilliams, Ben Meiselman and Aditi Thapar at the Research Seminar in Quantitative Economics in the U-M Department of Economics.

Unemployment will continue to fall from last year's rate of 5.3 percent to 4.9 percent this year, 4.7 percent next year and 4.6 percent the year after, which should help part-time workers who want to find full-time jobs.

Overall economic output growth (as measured by real Gross Domestic Product) will strengthen slightly, from 1.6 percent last year to 2.3 percent in 2017 and 2.1 percent in 2018.

"Two cyclical sectors of the economy—light vehicles and single-family housing construction—appear to be at a crossroads," Ehrlich said. "We think that new light vehicle sales may have peaked already and will slow gradually over our forecast."

The analysis also suggests that millennials remain interested in owning cars and that low car ownership among millennials is related to low homeownership. For households with heads aged 26 to 35, the homeownership rate has fallen 10 percentage points from its pre-recession level.

"These observations suggest that millennials own fewer vehicles because they cannot afford to own single-family detached homes, not because their taste for vehicles is markedly lower than that of previous generations," Manaenkov said.

The forecast calls for continued recovery in housing starts. Despite brisk house price appreciation supported by low inventories of homes for sale and low mortgage rates, construction growth in 2016 has been mediocre relative to the last few years.

"The recovery in single-family housing construction appears to have taken another pause this year, but we project a continued recovery given how weak new residential construction has been relative to population since the end of the previous recession," Meiselman said.

Construction of new homes, both single-family units and multi-unit housing, will rise to 1.25 million units next year and 1.33 million the year after. Sales of existing single-family homes are expected to increase from 4.79 million this year to 4.85 million in 2017 and 5 million in 2018.

According to Ehrlich and colleagues, sales of light vehicles will total 17.4 million sold this year, 17.3 million next year and 17.2 million the year after.

"Overall, we see the balance of risks to our forecast as tilting slightly toward the downside," Thapar said. "Absent any large shocks to federal economic policy, however, we forecast two more years of growth for the U.S. economy in 2017 and 2018."

Despite the current weakness in inflation, core Consumer Price Index inflation is projected to climb to 2.1 percent by 2018, and the U-M forecasters expect the Fed to raise interest rates by 50 basis points each year through 2018.

They predict that by the end of 2018, the 3-month Treasury bill rate will rise to 1.5 percent, the 10-year Treasury bond yield will reach 2.8 percent, and the 30-year mortgage rate will reach 4.4 percent.

The U-M forecast is based on the Michigan Quarterly Econometric Model of the U.S. Economy and compiled by the U-M Research Seminar in Quantitative Economics.