Predicting continued growth in U.S. GDP, employment and consumer spending, the president of the Federal Reserve Bank of Richmond painted a bright outlook for the economy this year when he spoke earlier this month in Wilmington.

Jeffrey Lacker, who has headed the Richmond Fed since 2004, cited strengthening labor markets and a healthy household sector as reasons that the Federal Reserve may continue to raise interest rates, despite movement toward easier monetary policies elsewhere around the world.

“These policy decisions were a response to slowing inflation and economic growth in their respective regions,” Lacker said, mentioning the Bank of Japan and the European Central Bank in particular. “But the situation in the United States is different.”

Just how quickly rates are likely to rise is uncertain, Lacker continued, but he cited a statement issued by the Federal Open Market Committee, the Fed’s rate-setting arm, in mid-March saying that it expects economic conditions “will evolve in a manner that will warrant only gradual increases in the federal funds rate” – essentially the same language that has been used since the committee raised rates in December, he said.

Lacker spoke April 12 at University of North Carolina Wilmington as part of the Chancellor’s Distinguished Lecture Series.

Economic indicators that provide the basis for Lacker’s economic outlook include a 2.8 percent rise in consumer spending, and a 2.7 percent rise in disposable income over the past year and an increase of more than $30 trillion in household net worth in the past seven years. Undergirding these statistics is what Lacker termed “a strong labor market,” which has added more than 2.8 million new jobs in the past year.

He mentioned also the growth of the housing market and increased business spending on equipment, intellectual property and nonresidential structures, plus a slight rise in government spending, as favorable indicators of future economic growth.

“Adding all this up, the evidence suggests that in the near term real GDP is likely to continue to grow at a pace very close to the 2.1 percent rate we’ve seen since the end of the recession,” Lacker said. “Growth at that rate would generate further employment gains and a lower employment rate.”

Ultimately, however, as the U.S. reaches maximum employment, GDP growth is expected to begin tapering off, Lacker said. If productivity advances at about 1.25 percent per year, the economist predicts “convergence to real GDP growth of around 1.75 percent.”

Lacker also talked about the United States’ continued leadership in innovation.

“Our institutions of higher learning are worldwide leaders in research and education, and they continue to attract exceptional students from both home and abroad,” he said, but noted some challenges such as the growing wage differentials between those with education and training and those with low skills. 

Over time, one would expect the higher wages available to skilled tech workers to spur more young people to seek the education necessary to compete for those jobs, but that is not the case, Lacker said.

“Combined with relatively low college enrollment rates and high college dropout rates, particularly for lower-income and minority students, the inescapable conclusion is that we are failing to keep up with our economy’s demand for skilled workers,” he said. 

He said the Richmond Fed’s review of available research suggests several strategies to tackle the problem: do a better job of informing middle and high school students about what is required for success in college; ensure that the K-12 education system is capable of providing students with college success skills; provide middle and high school students with information about other post-secondary educational options; and ensure students – who may overestimate the cost of college – have accurate information.

Another essential strategy is to invest in high-quality early childhood education, which Lacker said “would yield exceptional returns and would help broaden opportunities for students of all backgrounds.”

Asked after the talk what he would recommend that college seniors know about economics before graduating, Lacker listed three things: an understanding that markets do pretty well at allocating resources; that changes in the world will change the opportunities available to them; and that the key to a successful future is the skills they have and will acquire in the future as lifelong learners.