USA TODAY International Edition
Analysts say economic boom will slow in 2019
This year is likely a high-water mark for the U.S. economy, but 2019 won’t be anything close to the plunge into the abyss that recent stock market gyrations have suggested.
If the economy were a jet that finally reached cruising speed in 2018, it will throttle back moderately next year before slowing further in 2020, economists say. And if it keeps growing past July it will mark the longest expansion in U.S. history.
After notching an expected 3 percent gain this year – which would be its best showing in more than a decade – the nation’s gross domestic product is projected to grow 2.6 percent in 2019, according to the average estimate of 51 economists surveyed by Wolters Kluwer Blue Chip Economic Indicators.
While job growth is poised to slow, wage increases are accelerating. And healthy consumer spending is likely to offset a slowdown in business investment growth and a sputtering housing market.
“This is still a robust economy,” says Barclays economist Jonathan Millar.
But Millar and others see the economy on a glide path downward the next couple years amid the fading effects of federal government tax cuts and spending increases, steady Federal Reserve interest rate hikes and the Trump administration’s trade fight with China.
“Next year is going to be all about finding the soft landing zone,” says economist Greg Daco of Oxford Economics.
Economists surveyed by the National Association of Business Economics expect the odds of recession to rise from 10 percent early next year to 50 percent in 2021 or later.
One reason a slump isn’t inevitable: The economy isn’t beset by excesses such as the tech stock run-up and housing bubble, which led to downturns in the early and late 2000s.
“Household and businesses, borrowers and lenders, savers and spenders … have been more cautious this time,” says Joshua Feinman, chief global economist of DWS.
Here’s a breakdown of the economy’s strengths and weaknesses in 2019:
Strengths
❚ Jobs: Average monthly job growth is expected to slow dramatically from well over 200,000 this year to about 160,000 in 2019, says economist Michael Feroli of JPMorgan Chase. That’s not because employers don’t need as many workers but rather the opposite: The 3.7 percent unemployment rate, a near-50-year low, will make it increasingly challenging to find them.
The improving labor market has drawn in lots of prime age workers on the sidelines, keeping unemployment from falling even more rapidly. But Feroli says that surplus labor supply is running thin. By the end of 2019, he expects the jobless rate to tumble to 3.3 percent, which would be the lowest since 1953.
That would further stoke wage growth that has picked up in recent months to 3.1 percent annually. Economist Paul Ashworth of Capital Economics looks for 3.5 percent average pay increases next year while Feroli forecasts upward of 4 percent.
❚ Consumer spending: Workers’ fatter paychecks should partly offset reduced income gains as a result of the slower pace of job growth.
Meanwhile, the lift to spending from the federal tax cuts that Congress passed late last year has largely played out, Feroli says. Much of that void can be filled by cheaper oil and gasoline. The average household should save $224 to $480 on gas next year, depending on how low pump prices go and whether they stay there, Moody’s Analytics says.
All told, consumer spending should grow 2.7 percent next year, in line with 2018’s increase, according to the Wolters Kluwer survey. Feroli predicts just a 2.4 percent rise.
Solid but slowing
Business investment: Business spending on things like new factories and computers was a big part of the economy’s success this year. President Donald Trump promised the tax cuts would juice investment, and they seemed to provide at least a modest bump the first half of the year as firms could write off purchases more quickly.
But business investment slowed markedly in the third quarter, and some economists believe most companies intent on taking advantage of the favorable tax treatment have done so.
Meanwhile, businesses will face other hurdles to brisker spending, Feroli says. Stronger wage growth will boost consumers but squeeze corporate profit margins. Lower oil prices will mean less drilling and related purchases. And higher interest rates will increase the cost of business loans. The economists surveyed predict investment growth will slow from 6.8 percent this year to 4.3 percent in 2019.
The same can be said for the federal government’s $1.5 trillion tax cut and spending increases of $320 billion over two years. The stimulus will peter out quickly in the second half of 2019, analysts say. After adding seven-tenths of a percentage point to growth this year, the package will add a half a percentage point in 2019, Daco says.
Weaknesses
Rate hikes: After lifting its key shortterm rate nine times since late 2015, the Fed on Wednesday signaled two more hikes next year, down from three in its prior forecast. That would bring the rate to about 2.9 percent by late 2019.
The central bank is gradually nudging rates higher to head off a spike in inflation. But the increases are pushing up borrowing costs on credit cards, home equity lines, adjustable-rate mortgages and auto loans. Since the increases take time to ripple through the economy, their cumulative effect will crimp growth next year, Ashworth says.
Trade war: Trump has slapped tariffs on $250 billion in Chinese imports while China has responded with duties on U.S. exports to that country. A 90day truce has delayed a scheduled increase on most of the U.S. tariffs, but many economists don’t expect a quick resolution. Daco reckons the standoff will shave two-tenths of a percentage point off growth next year. Feroli thinks Trump will impose tariffs on the remaining $267 billion in Chinese shipments, trimming growth slightly more.
Meanwhile, the slowing global economy and strong dollar are likely to hamper U.S. exports, slicing another half point off growth, Feroli says.
Housing: Investment in building and renovating homes has fallen for three straight quarters as mortgage rates have risen and home prices have climbed. Daco expects spending on housing to dip further in 2019. “Affordability has worsened,” Millar says.