U.S. economy will add nearly 3 million jobs in next two years

ANN ARBOR—America’s economic recovery of the last two years will finally add the one thing it’s lacked—more jobs, say University of Michigan economists.

"We expect to see a strengthening of the jobs picture, with monthly gains in payroll employment exceeding 100,000 over the next several months and moving up from there through the summer months," said Saul Hymans, U-M professor of economics. "Over the next two years, strong output growth and more moderate productivity increases create an improving labor market, with the payroll job count finally reaching its previous peak in spring 2005."

In their annual spring forecast update of the U.S. economy, Hymans and colleagues Joan Crary and Janet Wolfe predict employment growth of 900,000 jobs this year and 2 million jobs in 2005. Unemployment is expected to fall from last year’s 6 percent average to 5.4 percent this year, 5.1 percent next year and below 5 percent by the start of 2006.

The economists say national economic output (as measured by real Gross Domestic Product) will post a 4.7 percent growth rate for this year—the highest in 20 years—and 3.8 percent in 2005.

"One very big reason the turnaround in payroll jobs has been so long in coming is that we just haven’t had enough output growth," Hymans said. "The other main reason is that we’re managing to generate better productivity improvement than used to be the case.

"That’s definitely a positive factor in terms of our ability to generate long-term improvements in living standards. But it compounds the weakness in job growth resulting from slow output growth."

Similar to the outlook on employment and GDP growth, the forecast for interest rates and inflation will remain positive over the next two years, Hymans and colleagues say.

The conventional mortgage rate will average 5.7 percent this year and 5.9 percent next year, after averaging 5.8 percent in 2003. The rate for three-month Treasury bills will remain steady at 1.1 percent this year and then rise to 2.4 percent in 2005, while the 10-year Treasury bond rate ticks upward from 4 percent in 2003 to 4.1 percent in 2004 and to 4.4 percent the year after.

Inflation remains exceptionally low this year, the U-M economists say. The core Consumer Price Index slips from 1.5 percent last year to 1.4 percent this year, before picking up with rates of 2.2 percent in 2005 and 2.6 percent heading into 2006.

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

• Energy prices (both crude oil and gas fuels) will back off from recent highs, but will still post levels well above those of late 2001 and early 2002.

• P rivate housing starts will remain strong at 1.86 million units in 2004 and 1.83 million in 2005.

• Sales of light vehicles will steadily increase from 16.6 million units in 2003 to 16.7 million this year to 16.9 million in 2005.

• Real disposable income will rise 3.7 percent in 2004 and 3.1 percent next year, after posting a 2.5 percent increase last year.

Saul Hymans faculty bio

Joan Crary faculty bio

Janet Wolfe faculty bio

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