After a year of improvement, the U.S. economy may face challenges in 2019 as waning stimulus, less friendly monetary policy coupled with decelerating global growth are among the multiple risks for a slowdown, economists said.
"Real U.S. gross domestic product (GDP) growth of 2.7 percent is forecast for 2019, slowing in the second half of the year as the effects of fiscal stimulus begin to fade," analysts from Bank of America (BofA) Merrill Lynch Global Research said in their 2019 outlook report released in December.
The unemployment rate could reach a 65-year low of 3.2 percent by year-end, pushing wage growth of 3.5 percent in aggregate. Core price inflation should gradually rise to 2.2 percent through 2019 and hold as rates continue to rise.
The housing market is no longer a tailwind for the U.S. economy, "we believe housing sales have peaked and home price appreciation is forecast to slow," said the research team.
SLOWING GROWTH
The projection of an economic slowdown was widely shared by many renowned institutions.
Goldman Sachs said in November that the U.S. GDP growth will slow to below 2 percent in the second half of 2019, as the U.S. Federal Reserve continues to raise interest rates and the effects of corporate tax cuts fade.
"Growth is likely to slow significantly next year, from a recent pace of 3.5 percent-plus to roughly our 1.75 percent estimate of potential by end-2019," wrote Jan Hatzius, chief economist for the investment bank, in a recent note to clients.
"We expect tighter financial conditions and a fading fiscal stimulus to be the key drivers of the deceleration," said Hatzius.
The bank saw the economy expanding at 2.5 percent in the fourth quarter of 2018, down from 3.5 percent in the third quarter. Real GDP growth will come in at 2.5 percent again in the first quarter of 2019, but then will slow to 2.2 percent, 1.8 percent and 1.6 percent in the next three quarters, respectively.
2018 has roughly been a banner year for the world's largest economy, especially in the second and third quarters, thanks largely to federal spending and tax cut.
U.S. GDP rose at an annual pace of 3.4 percent and at 4.2 percent in the second quarter, the Department of Commerce said late December in its third estimate.
The economy has been firing on most of its cylinders, as consumers spent more, companies invested in inventories, and local governments maintained their spending, said the department.
While many barometers for U.S. economy still look encouraging -- unemployment near a half-century low, inflation tame, pay growth picked up, and consumers spending robust in this holiday season -- economists cautioned the looming of headwinds.
Gregory Daco, chief U.S. economist at Oxford Economics, warned recently that the falling stock market reflects multiple hazards that can feed on themselves.
"What really matters is how people perceive these headwinds - and right now markets and investors perceive them as leading us into a recessionary environment," Daco was quoted by The Associated Press.
Forecasting firm Macroeconomic Advisers in November estimated a growth rate of 2.5 percent for the fourth quarter of 2018.
The Fed expected the U.S. economy to grow at 3 percent in 2018, a bit lower than 3.1 percent estimated in September, according to its latest economic projections in December. Moreover, the central bank lowered its 2019 growth forecast from 2.5 percent to 2.3 percent.
FADING MOMENTUM
Analysts expected a fading fiscal stimulus in the year ahead, noting the boost from tax cuts is not "sustainable."
The U.S. economy showed signs of late-stage expansion cycle early in 2016, Guan Ning, Co-founder & CEO of Quant Space AM, a U.S. asset management firm, told Xinhua in October. Policies including tax cuts and deregulation have boosted the equities market, helping prolong the economic recovery; however, the cycle "would come back," she said.
The United States passed its biggest tax overhaul in three decades in December 2017. In the tax revamp, corporate tax rate was slashed from 35 percent to 21 percent.
U.S. President Donald Trump and Republicans have expected the move to boost corporate investment and hiring and keep companies from leaving the United States, while Democrats have criticized the law as a giveaway to the wealthy.
A recent study from the New York-based Conference Board finds that the U.S. expansion will likely peak in the next few months as the effects of tax cuts and fiscal spending wane during the course of 2019.
An annual economic forecast released in November by the University of Michigan showed effects of tax cuts on U.S. economy will start to diminish in 2019 before fading out in 2020.
Meanwhile, an October survey conducted by the National Association for Business Economics indicated that U.S. firms saw improved profit margins in the third quarter of 2018, but the tax reform "has not broadly impacted hiring and investment plans."
Others even alarmed tax cuts could pose economic risks in the medium term.
These risks include higher public debt, an inflation surprise, international spillover, future recession, and increased global imbalances, the International Monetary Fund (IMF) said in July.
A newly-released report by the U.S. Treasury Department showed U.S. federal budget deficit spiked to a record 204.9 billion U.S. dollars in November, the second month of the government's fiscal year 2019, due to the tax cut and increased government spending.
The Congressional Budget Office warned that growing budget deficits would boost U.S. public debt sharply over the next 30 years if current laws generally remain unchanged.
Earlier report from the Treasury Department showed that federal budget deficit registered 779 billion dollars in the fiscal year 2018 ending Sept. 30.
TIGHTENING MONETARY POLICY
Economists hold that a mistaken faster or tighter than expected monetary policy may pose threat to the economy.
The Fed has raised the key short-term rate four times in 2018 and indicated two more hikes in 2019. It generally increased rates to keep growth in check and prevent annual inflation from rising much above 2 percent.
If the central bank were to miscalculate and raise rates too high or too fast, it could trigger the very downturn that Fed officials have been trying to avoid, experts noted.
Bridgewater, the world's largest hedge fund, warned that the U.S. economy faces a looming deceleration as tighter monetary policy starts to weigh on growth and ratchets up pressure on financial markets.
"We are at a potential inflection point where the economy is moving from hot to mediocre," Bob Prince, co-chief investment officer at Bridgewater, said in a note.
"As long as the Fed continues to raise rates, the grim reality of an overhanging recession risk will be there and the prudent trade will be away from risk assets," said Chris Low, chief economist at FTN Financial.
Over the past year, the Fed's rate hikes have tightened global financial conditions and brought spillover effects for emerging markets, some of which have faced strong pressure in capital outflows and currency devaluations.
BofA Merrill Lynch forecast global monetary policy to become less friendly in 2019. "A divided government means that additional fiscal stimulus in the U.S. seems unlikely. Europe is largely frozen in place by its budget rules, and Japan appears ready to implement yet another ill-timed consumption tax hike," said its researchers.
The Conference Board projected a continuous tightening monetary policy but probably at a moderate pace, "unless inflation emerges much faster than anticipated."
GLOBAL RISKS
The world economy is showing clear signs of a downshift, with both developed and emerging economies expected to expand at a slower speed. Their deflating growth can, in turn, weigh on the U.S. economy.
BofA Merrill Lynch said in its 2019 outlook that global growth is expected to dip from 3.8 percent in 2018 to 3.6 percent in 2019 amid potential risks, adding that the slowing growth is likely a benign slowdown, instead of a "recession."
A less friendly policy environment suggests a significant slowing in growth globally and risks including uncertainties caused by lingering global trade tensions and Brexit are skewed to the downside, according to analysts.
Moreover, a poll of economists by Reuters in October cautioned that an escalation of global trade actions could lead to substantial slowdown in U.S. economy by 2019.
"There would be no winners from a global trade war...all countries would ultimately be worse off compared to the status quo," noted Neil Shearing, group chief economist at Capital Economics. It "would inflict lasting damage to growth and cause a permanent loss of output," he added.
"Looking beyond 2019, the main concerns are slower growth of labor supply and modest projections of productivity growth," said Bart van Ark, Executive Vice President and Chief Economist at The Conference Board.
The research institute projected global growth to be 3.1 percent in 2019, down from 3.2 percent in 2018.
Economist, positive or pessimistic about the future, agreed that 2019 is likely to be challenging for both investors and policymakers.
Latest comments