The United States economy has reached full employment. The November unemployment rate was 4.1%. Most people who want to work are working. There are only 1.1 unemployed people per job opening, the same ratio as at the end of the long 1990’s expansion. Most people who are looking for work will find a job soon.

An economy can grow faster if it has unemployed people, and if it has vacant buildings and unused equipment. If someone wants to buy what businesses and their employees can produce, new jobs are created and there are people to fill them. Businesses expand into available space and begin using available equipment. Output increases.

On the other hand, an economy at full employment is likely to grow more slowly. There may be no one available to fill the new jobs that businesses create. The number of people newly entering the labor force, minus the people who drop out or retire, puts a limit on job growth. An entrepreneur may have a great business idea, but no empty space to rent. Space becomes available only when construction companies and their workers build new buildings. A factory operating at maximum capacity may have to refuse an order until new equipment is manufactured and new employees arrive.

Full employment limits our economy to the growth of the labor force plus the growth of the tools and technology that workers use. Between 1980 and 2008, when the baby boomers were all old enough to work but too young to retire, the labor force grew 1.3% per year. Now baby boomer retirements are a drag on labor force growth. Since 2008, the labor force has grown only 0.4% per year. Over the past year, growth has been a little faster, at 0.8%.

Labor productivity is growing slowly too. It can be measured by the value of goods and services that the average worker produces. Productivity had a burst of growth between 1996 and 2005, as new information technology came into use. Output per worker grew 2.1% per year. Lately productivity growth has slowed. Since 2005, it has grown only 0.8% per year.

Add it up! Recent labor force growth of 0.8% plus productivity growth of 0.8% means that the economy’s capacity can grow only 1.6% per year.

What if consumers, or businesses, or governments, or the rest of the world try increasing their spending on goods and services at a pace above 1.6% per year? Then some- thing has to give. Businesses might raise wages, to attract people from retirement or out of the home. Labor force growth would increase. Businesses might invest in new machinery or technology. Productivity would increase. Businesses might offer training to less-qualified people. The unemployment rate would fall some more. Business- es might raise prices to offset cost increases, or simply because strong demand allows them to. Inflation would increase.

All of these things could happen in 2018. Consumer spending has increased 2.6% over the past year. With jobs available, stock and home prices rising and consumer confidence high, spending should continue to grow. Investment spending growth has been modest, 4.6% over the past year. Capital goods orders are rising, so equipment investment may increase. Home prices keep climbing and building permits are edging upward, so we may see more home construction. With corporate interest rates still near record lows, investment spending should increase more rapidly.

Congress may pass a tax cut. Perhaps new investment will increase productivity and the economy’s capacity, but that is unlikely to happen as soon as 2018. Added after-tax income surely will add to spending, though.

Expect real gross domestic product to grow 2.2% over the next year, the same as the average since the Great Recession ended. That is above the 1.6% capacity limit, so both the labor force and productivity will have to grow a little faster to meet added demand. The unemployment rate may fall a little, to 4.0% by this time next year, or perhaps a tenth or two lower.

Added spending at full employment should cause inflation to rise. The all-items “headline” inflation rate has been 2% over the past year. The “core” inflation rate not counting energy or food has been 1.8%. Expect them both to be above 2% next year — say 2.3%.

The Federal Reserve has been waiting for this inflation, and wondering why it has not yet appeared. In 2018, it will, so look for four one-quarter-point increases in the federal funds rate over the next year. The new Fed chair, Jerome Powell, will look comparatively active. The 3- month Treasury bill yield should rise from 1.3% now to 2.3% next December. The ten-year Treasury bond rate will rise about half-a-point, to 2.8%.

Here’s news: this forecast will be wrong. Will it be just a little wrong, so that the story it tells is mostly right? Or a lot wrong, because of shocks to spending or productivity? Shocks are called shocks because they are unpredictable, but here are some possibilities:

1. Debt problems in China could upset financial markets.
2. Brexit uncertainty could slow growth in the U.K. and Europe, more so if Germany has trouble choosing a chancellor.
3. Brinksmanship in Congress over raising the debt limit could upset financial markets too. If there is no tax cut, inflation and interest rates will be lower.

Assuming we are not shocked, though, expect another year like last year, and the year before that, and the year before that. We should see somewhat higher inflation and interest rates, somewhat lower unemployment, and steady GDP growth.