This is an excerpt from our most recent Economic Outlook report. To access the full PDF, please click here
With the U.S. economy clocking in at higher-than-expected GDP growth rates, one quarter after another, politicians on both side of the aisle debate. To what degree can this pace be maintained?
Proponents of the recent the economic courses of action argue the latest numbers are evidence of well-designed policies. Opponents question their sustainability, arguing we are on a ‘sugar high’.
What about the view of the economists out there?
- Fed economists have projected lower GDP growth rates in 2019 and 2020 (similar to our quantitative models).
- A recent survey by the Wall Street Journal indicated 59% of private sector economists expect the current expansion to end in 2020.
- Zacks economists surmise this. A number of sub-items in the most recent GDP numbers are relevant to this debate.
The following three groups will best show us where we are headed:
Business Spending: Corporate tax cuts have benefitted companies initially with a +11.5% growth rate in the first quarter. But based on the most recent business spending growth of +0.8% it appears that effect is fading. This is in line with empirical evidence, which suggests that tax cuts tend to impact business spending for just 2 subsequent quarters after implementation.
Typically, in these 2 quarters, investments are made which have the potential to increase long-term growth, such as equipment, new technologies, and software. The big wild card is to what degree this will increase long-run growth potential.
Housing: For the first time home price growth has slowed and should continue to do so as mortgage rates will rise.
The graph below illustrates New Private Housing Starts declined the past 6 months.
Besides interest rates, a main driver for this housing starts slowdown was a steep increase in home prices, along with a change in tax laws, which reduced incentives for new buyers to buy a house.
As you also can see, housing starts are a far ways from the 2006 high. It will take a while for supply to catch up with demand (or vice versa). So, we do not expect the housing market slowdown to be a catalyst for a major GDP growth slowdown.
Consumer and Government Spending: Low unemployment levels have caused several months of record high consumer confidence. However, we expect that the boost in consumer spending through tax cuts will lose some of its momentum in the upcoming months.
Subsequently, a satiated consumer won’t be able to support spending levels. With employment and participation rates this high, we expect consumer spending growth to remain robust but with limited upside potential.
Furthermore, in the past 9 months, we have witnessed a significant increase in government spending, particularly on defense items. This should however be short-lived, given that a deal to boost spending runs out next September.
In short, the three sets of indicators best support the view of a ‘sugar high.’