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U.S. Economy: Just Slowing Down or Stalling?

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This is an excerpt from our most recent Economic Outlook report. To access the full PDF, please click here

The U.S. economy finished 2018 on a weaker note. Investors naturally wonder: Is this beginning an era of subdued growth around 2.0%? Or is this a flashing warning-sign about a recession in the making?

There are number of Global Economic Indicators to consult. In Asia, some are tentatively marking a bottom for the Chinese Economy. Meanwhile, uncertainty grows in Europe about a bona fide recession in Italy and very weak growth in Germany. These provide ample reasons for both viewpoints. It becomes increasingly difficult to develop an outlook for 2019, let alone 2020.

Put differently, will we see a continuation of the cycle so typical of the U.S. economy for the last couple of decades, or will we see moderation to growth rates that get the U.S. closer to an era of “secular stagnation” Larry Summers predicted the latter in his famous speech. He argued growth rates for the U.S. economy should be close to +2.5%, if no intervention through stimulative fiscal or monetary policy occurs.

Despite valid uncertainties around the U.S. China trade war, and overall worldwide development concerns, Zacks Economists expect 2019 and 2020 to be characterized by a subdued and moderate — but steady — growth path, close to 2.0%.

This is similar to Mr. Summers’ forecast. Some reasons?

  • Trade: Ongoing trade disputes between the U.S. and China, and those surrounding EU and U.K. negotiations, take a toll on all involved economies. Make no mistake: Even if favorable agreements are reached. This is due to a retarding of fixed investment over the last couple of years, in light of growing concerns by affected companies. However, we expect the ultimate effect from any trade negotiations to be not strong enough to catalyze a major global downturn (even in the case of unfavorable agreements). Trade skirmishes have a long tradition in the world economy. They were one of the main reasons why the World Trade Organization (the WTO) was founded out of the WWII-era General Agreement on Tariffs and Trade (the GATT) in 1995. It is our expectation that even if any current negotiations fail, new trading relationships will be established. These ultimately alleviate the overall effect on global growth.
  • Fed Policy: Since its December 2018 meeting, the FOMC has been very clear about not wanting to be — regarding rate hikes in 2019 and beyond — while further data is obtained -- in order to support ongoing expansion in the U.S. and global economy. In particular, multiple FOMC members repeatedly expressed concerns over further rate hikes in 2019. To us, this indicates the Fed is well aware of the consequences of a monetary policy mistake this late in the cycle. They will evaluate each further step very carefully.
  • Consumer spending: Despite the latest pullback in consumer confidence, we are still at historically high levels of consumer sentiment. Whether this momentum can be maintained will be crucial (in our view) to the question of sustained but tamped-down U.S. growth, or a major U.S. recession. With consumption making up such a large share of GDP, we are confident. Even as key parts of the global economy show renewed signs of weakness (e.g. Germany and Italy’s economies being the most prominent example) the U.S. economy might be able to pull through... as long as unemployment remains relatively low and consumers maintain their spending habits.

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