Growth seen hitting 3% in 2018, but risks to outlook mount after this year
Economists in fret about fading fiscal stimulus, higher Fed rates and trade tensions
Economists are revising up their projections for growth in U.S. output this year, but disputes with U.S. trading partners, a fading boost from fiscal stimulus and rising short-term interest rates leave them thinking strong growth won’t last much longer than that.
The average estimate for growth in 2018 reached 3%, up from 2.9% last month and up from 2.4% a year ago, according to The Wall Street Journal’s monthly survey of private economists. The average forecast predicts by the middle of next year the unemployment rate will drop to 3.6%. If the forecast is realized, it would be the lowest unemployment rate in nearly 50 years.
Consumer spending and business investment were robust in the spring, thanks in part to tax cuts that put more money in household pockets and gave businesses a higher after-tax return on their investments.
“The tax cuts and jump in federal spending will keep the economy buzzing for another 12 months,” said Bernard Baumohl, chief economist of the Economic Outlook Group. “Beyond that, however, I expect to see dark clouds forming that would signal a recession is near.”
Mr. Baumohl isn’t alone in a dour outlook after the boost from last year’s tax cuts begins to fade and because rising tariffs between the U.S. and its trading partners could lead to repercussions for the economy. Businesses that were enthused about the tax relief could hold off from hiring and investing in the face of trade uncertainty, several economists said.
“Prospects of trade war are eroding business confidence from the Tax Cuts and Jobs Act,” said Kevin Swift, the chief economist of the American Chemistry Council.
The chemicals industry is among those facing tariffs on imports, and the association has criticized the tariffs.
The average forecast for growth in 2019 was 2.4%, little changed in recent months. By 2020, the average forecaster projects economic growth will slow to 1.8%, down from estimates earlier this year of 2%.
The Trump administration has said 3% growth or better can be sustained. Other government forecasters, including the Federal Reserve, are projecting a slowdown from the elevated growth rate of 2018.
Inflation, as measured by the consumer-price index, is forecast to remain above 2% through 2020, a backdrop that will require the Fed to continue raising interest rates, ending next year with its benchmark federalfunds rate at about 3%. The Fed held its benchmark rate near zero for much of the expansion and begin gradually lifting it in 2015.
Higher Fed rates, while containing inflation, could also help tamp down growth.
The pace of job creation is expected to slow somewhat. Over the past year, the economy added about 200,000 jobs a month. Over the next year, the panel estimates an average of 167,000, although some slowdown is to be expected as the economy simply has fewer unemployed people to pull into the labor market.
While the immediate outlook for the rest of 2018 is strong, economists see an 18% chance of a recession beginning in the next 12 months. Those are the highest odds since President Trump’s election 21 months ago.
A number of major trade decisions hang over the economic outlook. The resolution of negotiations over the North American Free Trade Agreement is still unclear, potentially jeopardizing extensive trading relationships with Mexico and Canada. The administration is also considering imposing tariffs on imports of automobiles and auto parts., though tentative negotiations are under way with the European Union that could avert at least some of those tariffs.
The economists in the survey placed the odds of a Nafta pullout at about 29% and the odds of auto tariffs at 31%. Like with a recession, most think it will probably be avoided, but view the risks as uncomfortably high.
Asked to assess the risks to their forecasts, 58% of economists saw “downside risks,” meaning they think that if their forecasts are wrong, it is because the economy will have performed worse than they expected. But 31% saw “upside risks,” scenarios in which the economy performs better.
“If we avoid a trade war, and remove the threats of a trade war, we could see more muchneeded business investment in the economy,” said Diane
Swonk, chief economist of Grant Thornton
The Journal’s survey of 57 business, financial and academic economists was conducted Aug. 3-7. Not every forecaster answered every question.