Economists split on how midterms will affect uncertainty
Experts estimate break-even pace of monthly job gains over next 12 months is 127,000
Economists surveyed by The Wall Street Journal were roughly split on whether the outcome of the recent midterm elections would dispel or increase uncertainty for the economy and financial markets in the coming months. The vote means that come January, Democrats will take control of the House of Representatives, while Republicans will retain control of the U.S. Senate.
Nearly half of respondents in the economists’ survey, 46%, said economic uncertainty would increase somewhat following the midterms, while 40% of respondents expected it would decline somewhat after the vote.
Natixis economist Joseph LaVorgna said the outcome creates “less certainty and more political risk.”
Other economists didn’t expect a divided Congress would meaningfully alter the economy’s trajectory, and some said it could even raise the prospect of a speedier trade agreement with China or a bipartisan infrastructure bill.
“Despite partisan divisions, Congress and the president will have to confront some mustpass items on the legislative agenda,” such as a deal to avoid a partial government shutdown next month and ratification of the new trade agreement between the U.S., Mexico and Canada, said Gregory Daco of Oxford Economics.
Of respondents in the survey, 10% expected a significant decline in uncertainty for the U.S. economy and financial markets and 4% expected a significant increase in uncertainty.
Half of economists expected the next recession to start in 2020—the year of the next presidential election—and just over 70% of respondents said that there was a greater risk that economic growth would undershoot their forecasts over the next 12 months than overshoot.
“Politics could undermine [the] economy’s momentum,” commented Sean Snaith, an economist at the University of Central Florida.
One point economists appeared to agree on is they expected the labor market to remain strong.
They estimated employers need to add just over 127,000 jobs a month over the next 12 months for the U.S. economy absorb new workers into the labor force and hold the unemployment rate steady.
The new estimate of 127,285 jobs a month as the break-even pace of job growth is down from an estimate of 145,000 that economists submitted two and a half years ago.
The decline reflects a labor market that has been on a strong streak in recent years— one that economists expect to continue.
According to these estimates, if employers are consistently adding more than127,000 jobs a month, then the unemployment rate should continue to drift lower. If the gains fall below that pace, joblessness will climb.
Economists didn’t expect job gains to slow to that pace any time soon. On average, they expected employers would add just over 200,000 new jobs to nonfarm payrolls a month in the fourth quarter. That should decelerate to nearly 146,000 a month in the fourth quarter of 2019, a number still well above the break-even pace. Last month, employers added 250,000 new jobs. The question of how many jobs the U.S. economy needs to add each month to keep the unemployment rate steady is one of much debate as it informs how quickly the Fed should raise or lower interest rates to keep the economy on an even keel.
Some officials think if the unemployment rate keeps falling, it raises the risk of excessive inflation and might justify lifting interest rates more aggressively. Others aren’t so sure, given how tame inflation has remained despite a sharp decline in unemployment since its recent peak of 10% in 2009.
The unemployment rate has been at its lowest level in nearly 50 years for the past two months, at 3.7%. In the latest survey, economists expected it to fall further by December, to 3.6%, and then drop to 3.5% by June 2019.
Fed Chairman Jerome Powell said in September that the 185,000 average monthly job gains over the three months prior was “well above the pace needed in the longer run to provide jobs for new entrants to the labor force,” although he didn’t specify his estimate of a breakeven number.
The Journal’s survey of 58 business, financial and academic economists was conducted Nov. 9-13, although not every forecaster answered every question.