By most measures, 2018 was a banner year for the U.S. economy. Wages grew and the unemployment rate fell to an almost 50-year low. The gross domestic product increased at a rate of 4.2 percent in the second quarter — the biggest increase in four years. And consumer spending, which is a major driver of the U.S. economy, hit an all-time high.
The question is whether the economy will continue to do as well or start to slow down in 2019. GOBankingRates asked five experts to share their outlooks for the economy to get some opinions on what lies ahead for the economy in 2019 and whether there are any signs of a recession.
Steve Rick is the chief economist for CUNA Mutual Group, an insurance, financial technology and investment company. Rick publishes the Credit Union Trends Report and has authored a book on asset-liability management. He also is a senior lecturer with the economics department at the University of Wisconsin-Madison and an instructor of CUNA Management School’s Stanford Bank Game.
A Look Back: States With the Strongest Economies in 2018
1. 2019 Likely Won't See a Recession
Rick expects the economy to continue growing in 2019, but at a slower pace. “In 2018 we had growth at about 3 percent, and in 2019 it should be a little lower at 2.3 percent, but that is still above the long-run average,” he said. “So 2019 will be a very good year — just not quite as good as 2018.”
The tariffs on China could have some effect on capital spending by companies in 2019, but that shouldn’t hurt the economy overall. Jobs and income are growing, consumer confidence is high and consumer spending should be strong in 2019, Rick said. “Right now there is so much momentum behind the economy that there is very little chance of a recession coming before 2020 — barring a black swan event that can’t be predicted or forecasted,” he said.
2. The Labor Market Will Be Strong
Rick sees the current unemployment rate of 3.7 percent dropping to about 3.3 percent in 2019, with about 170,000 jobs being added each month. “Even with the labor market continuing to tighten, there remains a large, untapped reservoir of workers still out there, and that will mean bringing people back into the labor force who aren’t currently working,” he said. However, he added that finding qualified workers could be a challenge for companies.
Rick also expects workers to get paid more, on average. He expects wages to grow by about 3.5 percent in 2019.
3. The Fed Will Raise Rates Two or Three Times in 2019
Rick expects the Federal Reserve to raise its benchmark interest rate two or three times in 2019. The federal funds rate is the interest rate at which depository institutions lend to each other overnight, and it influences rates on consumer loans and savings.
“We’ll continue to see rate hikes in 2019 because the economy is overheating at this point,” he said. “Currently, with unemployment at 3.7 percent — well below what the Fed considers the natural rate of unemployment at 4.6 percent — we’re not at a sustainable output for the economy, so it will have to slow somewhat.”
4. Student Debt Won't Cause a Recession
Despite concerns about the high level of student debt in the U.S., Rick said he doesn’t see it as the economy’s next pitfall. If there were a recession, many students would default on their debt. “But student debt wouldn’t cause a recession,” Rick said. That’s because the government has issued the bulk of student loans. If people defaulted on those loans, the government could cover the cost and print more money by running a larger deficit, he said.
Roger Aliaga-Diaz is the chief economist at Vanguard. He has published papers on macroeconomic issues and presented his research to the Federal Reserve Board of Governors, American Economic Association and American Enterprise Institute for Public Policy Research. Aliaga-Diaz has a Ph.D. in economics from North Carolina State University and has been a visiting professor at Drexel University.
1. Economic Growth Will Downshift
Economic growth will slow down to a low 2 percent range in 2019, Aliaga-Diaz said. But that’s nothing to worry about because economic growth has been so strong. “It’s truly a downshift from the current levels of growth,” he said.
In fact, 2 percent economic growth is the normal trend for growth in the U.S. If the rate of growth dropped to 1 percent or zero percent, that would be a sign of risk, he said. There are some indicators that the economy is entering into the late phase of a business cycle, such as more volatility in the financial markets and the Fed raising rates to slow down growth. “But you can be there for a while,” he said, and it doesn’t necessarily mean it will be followed by a recession.
2. Job Growth Will Slow
Jobs have been growing at double or triple the rate that the labor force is growing, which is why the unemployment rate has been dropping, Aliaga-Diaz said. “That is unsustainable,” he said. Job growth can’t continue at its current rate. In 2019, he expects to see 120,000 to 150,000 jobs added each month. To put that in context, the average monthly gain throughout most of 2018 was 209,000 jobs, according to the Bureau of Labor Statistics.
3. The Trade War Could Contribute to a Slowdown
The standoff between the U.S. and China over American tariffs on Chinese goods will likely continue. That’s because there are issues between the two countries that are much broader than trade that need to be dealt with, Aliaga-Diaz said. The effects of the trade war might affect the U.S. economy in various ways.
“Trade tariffs like the ones we’ve been seeing may impact marginally the pace of growth,” he said. But Aliaga-Diaz doesn’t see that putting the economy into recession. However, if tariffs are extended to all Chinese imports, that could lead to a more severe slowdown. “Clearly it’s a risk,” Aliaga-Diaz said.
4. The Fed Will Raise Rates Twice in 2019
Aliaga-Diaz thinks the Federal Reserve will continue its trend of raising rates. It raised its benchmark rate three times in 2018, and Aliaga-Diaz said the Fed is expected to raise it again at its December meeting. He said it likely will raise the benchmark rate twice in 2019, bringing it close to 3 percent.
Jurrien Timmer is the director of global macro at Fidelity Investments. He specializes in asset allocation and global macro strategy. He also is a chartered market technician, a frequent market commentator on CNBC and writes the monthly market report for Fidelity.
1. The Economy Will Grow at a Slower Pace
The tax cuts helped spur economic growth in 2018, but Timmer expects that growth to slow in 2019. However, he doesn’t expect the slowdown in growth to become a downturn in the economy. “We can continue this expansion for a while longer,” he said. If inflation doesn’t accelerate, the economy can continue to do well in 2019, Timmer said.
2. The Fed Will Raise Rates Twice in 2019
Timmer said the Federal Reserve will likely raise its benchmark interest rate two times in 2019. However, he said the rate hikes will be spread out over the year because he expects the Fed to take a wait-and-see approach. More of the economic indicators the Fed looks at when making rate decisions are flashing yellow now than they have been over the past year. “That will cause the Fed to have fewer hikes than it was planning,” Timmer said.
3. The Yield Curve Isn't Indicating a Recession Is Near
The U.S. Treasury yield curve is closely watched because it has been a sign of a recession when the yields on longer-term government bonds become lower — or inverted — than yields on shorter-term notes. Investors have been worried because the curve is flat between 10-year and two-year Treasurys.
“My sense is that people are a little too quick to connect dots that aren’t necessarily there yet,” Timmer said about the flat yield curve. He looks at the spread between 10-year and three-month Treasurys, which is not flat yet. “I see very little evidence that a recession is anywhere on the horizon,” he said. “I’m not too worried about the yield curve.”
4. The Housing Market Will Stabilize
As a result of rate hikes by the Fed in 2018, the cost of borrowing has been higher, which has impacted homebuying. However, Timmer expects the higher cost of borrowing to be balanced out by higher incomes thanks to wage growth and a strong labor market. “People are better able to pay for those mortgages,” he said. He expects the housing market, which has been experiencing a slowdown, to stabilize in 2019.
More importantly, Timmer doesn’t see any signs of the excessive borrowing that led to the housing market crash a decade ago. “The slowdown doesn’t mean it’s going to turn ugly,” he said.
Sameer Samana is a senior global market strategist for Wells Fargo Investment Institute, which is a subsidiary of Wells Fargo Bank. As a chartered financial analyst, he produces investment advice and has been a portfolio manager and fixed-income trader.
1. 2019 Will Be a Return to Normal
For the economy, 2018 was a year of acceleration, Samana said. Next year, growth will slow and revert back to a more normal pace. “What a lot of people are concerned about is how much of a slowdown there will be,” he said. “We see it as nominal.”
The current economic expansion will be the longest in history if it continues. “We are actively looking for signs that this cycle can come to a close, but we’re not seeing any,” Samana said.
2. Consumer Spending Will Be Strong
Samana expects unemployment to remain low and wages to continue to grow in 2019. That spells good news for consumer spending, which makes up 70 percent of the U.S. economy, he said. “We think consumers should continue to open up their pocketbooks,” Samana said.
3. The Market Could Rise 10 Percent in 2019
Sameer said that economic growth in 2019 will be enough to drive consumer spending. “That tends to have a good linkage to U.S company revenues,” he said. “If [consumer spending] grows in high single-digit range, we think earnings could grow 10 percent next year. We think the market could be up in the same neighborhood.” In other words, he expects the S&P 500 could end 2019 up 10 percent — or 12 percent if you factor in a 2 percent dividend yield.
4. The Fed Will Raise Rates Three Times
Samana thinks the Fed will continue to raise its benchmark interest rate in 2019 to keep the economy from overheating. Because the economy is still on steady footing, he said he believes there will be three rate hikes next year. However, he does expect the Fed to take a pause at the beginning of the year before continuing to raise its key rate.
Curt Long is the chief economist and vice president of research for the National Association of Federally-Insured Credit Unions. He also helps produce NAFCU’s CU Performance Benchmark Report and Economic & CU Monitor.
1. Economic Growth Will Slow Slightly
Like other economists, Long expects economic growth to slow down in 2019 as the effects of the Trump tax cuts and fiscal stimulus of 2018 fade. Thanks to the recent strong growth in the economy, though, a slowdown doesn’t spell disaster in the coming year. “You have more wiggle room before running into a recession,” he said. In fact, he expects the economy to grow 2 percent in 2019.
2. Trade Will Be a Source of Uncertainty
Trade was a weak spot in the economy in 2018, and Long expects that it will continue to be the biggest source of uncertainty in 2019 because of the trade war with China. “Turn back the clock a few weeks ago, it looked like we were rounding a corner,” he said about talks between the U.S. and China to halt the trade war. “A few days later, it all came crashing down again.”
He said U.S. tariffs on Chinese goods already have had an impact on GDP. “It’s been a drag,” he said. “It’s becoming a more significant one.”
3. The Housing Market Will Continue to Be Weak
The housing market has been weak, and Long said he doesn’t expect to see a turnaround in 2019. The problem has been too little supply of homes to meet the demand, and he doesn’t see that changing. “I think we’re going to continue to see some weakness in terms of residential construction,” Long said.
However, because demand has waned slightly as mortgage rates have increased, there’s more balance in the market now, he said. As a result, he expects the growth in home prices to be moderate.
4. The Fed Will Raise Rates One or Two Times in 2019
Long said that the Federal Reserve projected at its September 2018 meeting that it would raise its benchmark interest rate three times in 2019. “We expect that will be dialed back to two because of everything that has happened between September and now,” Long said.
In fact, because of the risks in the economy that Federal Open Market Committee members have acknowledged, Long said the Fed might slow down its rate increases even more. “I would even lean toward one rate hike,” he said.
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