The U.S. economy is expected to continue its slowdown in 2019 but not necessarily slip into recession as the trade war between the U.S. and China continues and the fiscal stimulus from the massive federal tax cut begins to fade along with the economic expansion.
The expansion, now in its 10th year, will become the longest ever recorded if it continues into July.
Forecasts for GDP growth in this late-cycle expansion, adjusted for inflation, range from 2.3% to 2.9% for next year, though there are some outliers including Goldman Sachs, which is forecasting U.S. growth closer to 2% next year.
How much the economy will slow will depend in large part on U.S.-China trade relations and Federal Reserve policy.
As of now, the U.S. and China have imposed tariffs on a portion of each other’s exports, but the two nations agreed in early December not to expand their tariffs for 90 days.
To date, the U.S. has imposed tariffs on $250 billion worth of Chinese imports. The White House has threatened to raise the tariffs from 10% to 25% and extend them to cover an additional $267 billion worth of Chinese imports, but refrained when both countries agreed to the time-out. China has retaliated with tariffs on about $110 billion worth of U.S. imports, including Harley-Davidson motorcycles and soybeans, but recently resumed some purchases of U.S. soybeans and cut tariffs on U.S. car imports from 25% to 15%.
“China will probably give way, but all-out protectionism would precipitate a global recession,” writes Gary Shilling in his latest market insights report. In mid-December, representatives from the U.S. and China sparred at the World Trade Organization, blaming each other for the trade war.
Expectations for Fed policy may be less uncertain than those for U.S.-China relations. In its last policymaking meeting for the year, the Fed raised short-term interest rates to a range between 2.25% and 2.5% and lowered expectations to two hikes next year from three previously, along with expectations for slower GDP growth and lower inflation. In his press conference following the rate hike announcement, Fed Chairman Jerome Powell said that the central bank’s unwinding of its quantitative easing asset purchases was on “autopilot.”
The 10-year Treasury note rallied on the news, as its yield fell to its lowest level since May, but the stock market cratered because hopes of no rate hikes next year were crushed.
Median expectations of Fed policymakers call for 2.3% GDP growth, 1.9% headline PCE (personal consumption expenditures), 2% core PCE, which excludes food and energy prices, and a 3.5% unemployment rate.
The Fed now sees the “rising trajectory for growth” that it forecast in early 2018 as “moderating,” said Powell in his press conference. But he noted that the economy in 2019 “may not be as kind” to the Fed’s forecast as it has been this year, suggesting some uncertainty about the Fed’s economic outlook.
In its statement at the conclusion of the meeting on Wednesday, the Fed noted that although “risks to the economic outlook are roughly balanced,” it “will continue to monitor global economic and financial developments and assess their implications for the economic outlook.”
“Given the stock market declines and negative international economic news — recognized in the statement — this still points to quite a bit of confidence at the Fed in the ability of the U.S. economy to withstand a few more rate hikes,” said Brian Coulton, chief economist at Fitch Ratings, about the Fed’s latest move.
Following the Fed’s decision, the yield spread between 2-year and 10-year Treasuries narrowed, to just 15 basis points.