December 16, 2018
Slowing Growth and Greater Risk in 2019
The research center in which I work released our 2019 economic forecast this week. Like all economic forecasts, this one is likely wrong, but is hopefully useful. To talk about the forecast, it is best to re-examine 2018.
In many ways, this has been a good year for our economy. Employment growth nationally has been strong, and median wages for the world rose roughly one full percentage point above inflation. More people returned to work, with labor force increases strong throughout most of the year. It was, in short, a mostly good year, but the end of year news is far less salutary.
The Tax Cuts and Jobs Act, which I supported, proved a disappointment. Among its goals was the repatriation of between 2.0 trillion and 2.5 trillion dollars in assets held abroad. Only about 10 percent of that actually returned as investment. Another goal was to cause businesses to invest domestically. Business investment actually slowed deeply by year’s end. As it appears today, most of the economic effect of the TCJA was to promote domestic consumption.
Increased consumption caused the economy to grow more quickly in the first half of 2018, but it also led to higher budget deficits. Because we must borrow to finance these deficits, our trade deficit reached record levels by year’s end. The tax cuts were less beneficial than expected.
Unfortunately, most of the limited benefits of the tax cuts were offset by the growing trade war. The Trade Modernization Act of 1962 authorizes presidents to impose tariffs without consulting Congress. Tariffs are taxes levied overwhelmingly on US consumers, dampening the benefits of other tax cuts and worrying businesses. The expectation of higher tariffs in were sufficient to weaken the economy by late 2018, and today’s concerns are the story of 2019.
As of this writing, stock markets are now down for 2018, erasing a year’s worth of steady gains. The yield curve has inverted, signaling recessionary conditions and more informal indicators; for example, RV shipments to retailers will end the year in negative territory. The RV data worries me because fluctuations in sales of these big ticket luxury items have a better track record of predicting recession than any group of economists. On top of that, as the year ends, factory employment here in Indiana will end the year down from 2017.
New home construction has stalled and will likely decline throughout 2019, and, along with maybe four interest rate hikes, we should expect a deep slowing of construction jobs. Even if the Federal Reserve slows its rate increases, most indicators are of a slowing 2019. The sole good news comes from labor market growth, which is unfortunately a lagging economic indicator.
Forecast models typically involve large sets of equations that relate the different parts of the economy together. Those that weigh recent history more heavily will predict a strong 2019, especially those that value recent GDP and labor market growth. Models that weigh longer-term factors more heavily, such as business and government investment, will predict slower growth in 2019.
The models I write and use are more heavily weighted towards investment effects. Thus, my predictions have the US economy slowing in 2019 and beyond. Optimistically, I think the US economy will return to 2.0 to 2.5 percent growth for 2015. The Indiana experience will be a bit slower.
I am not predicting a recession, but it bears repeating that the growing trade war can easily yield negative economic growth. Indiana and indeed the Midwest as a whole will likely feel a trade-induced recession first and most deeply. This should deeply concern every Hoosier. The current expansion of a trade war has almost zero benefits, but carries huge costs.
No economic prediction can wholly ignore politics, and there’s been plenty of activity on that front. There is no evidence that split control of the Senate and House or impeachment hearings or proceedings impart any negative effect on the economy. What matters over the long run is the type of policy changes that result. Let us hope that all these are beneficial in the long run.
Finally, the recovery that began in 2009 is now the second longest on record. There is a good chance that in next year, we’ll be in the longest economic expansion in US history. One thing is for sure; if we dodge a recession in 2019, it won’t be for lack of trying.
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