The U.S. economy expanded at a 2.9 percent rate in 2018, just missing the 3 percent threshold that has not been reached since 2005.
In the fourth quarter, gross domestic product (GDP) increased at an annualized rate of 2.6 percent, exceeding forecasts that had hovered around 2.3 percent, according to the Bureau of Economic Analysis (BEA). This followed growth of 2.2 percent, 4.2 percent and 3.4 percent during the first three quarters of the year.
“We’ve accomplished an economic turnaround of historic proportions,” President Donald Trump said.
The strong performance was attributed, in part, to stimulus provided by the tax cut bill that was passed in December 2017. The effects of that bill, however, are expected to fade, and 2019, according to more pessimistic economists, could be somewhat disappointing. The first quarter, in particular, could be weak, with growth of less than 2 percent forecast. Recently, the January to March period has typically posted slower growth than the rest of the year, and that trend could be exacerbated this year by the impact of the 35-day government shutdown that ended on Jan. 25.
Employment data may be showing signs of a Q1 lull, with employers adding just 20,000 jobs in February, the Bureau of Labor Statistics reported. The unemployment rate, nevertheless, fell to 3.8 percent from 4 percent.
Members of the Federal Reserve Federal Open Market Committee (FOMC) “view a sustained expansion of economic activity … as the most likely [outcome] over the next few years,” according to the minutes of the panel’s Jan. 30-31 meeting. However, they do not expect this year’s growth to match 2018’s expansion.
“Participants generally continued to expect the growth rate of real GDP in 2019 to step down somewhat from the pace seen over 2018 to a rate closer to their estimates of longer-run growth, with a few participants commenting that waning fiscal stimulus was expected to contribute to the step-down,” the minutes stated. “Several participants commented that they had nudged down their outlooks for output growth since the December meeting, citing a softening in consumer or business sentiment, a reduction in the outlook for foreign economic growth, or the tightening in financial conditions that had occurred in recent months.”
FOMC members noted several risks to the economy, “including the possibilities of a sharper-than-expected slowdown in global economic growth, particularly in China and Europe, a rapid waning of fiscal policy stimulus, or a further tightening of financial market conditions. An increase in some foreign and domestic government policy uncertainties, including those associated with Brexit, an escalation in international trade policy tensions, and the potential for additional extended federal government shutdowns.”
Economists from the Federal Reserve Bank of New York, Princeton University and Columbia University released a study in March in which they concluded that the Trump administration’s protectionist trade policies are costing businesses and consumers in the United States about $3 billion each month in taxes, with companies suffering another $1.4 billion in deadweight losses.
“This is kind of the worst-case scenario in terms of consumers,’’ one of the researchers said. “It’s pretty unclear that this trade war is a net win for the economy at this point.’’
Trump, however, continues to stand by the tariffs, describing them at the Conservative Political Action Conference in March as “the greatest negotiating tool in the history of our country,” and pointing to ongoing trade talks with China. Mixed signals have emerged from those talks. While it had been hoped that Trump and Chinese President Xi Jinping might meet in March to wrap up a trade deal, that potential meeting has now been pushed back to at least April.
The Institute for Supply Management’s Purchasing Managers Index in February recorded its lowest confidence rating in more than two years – 54.2, down from 56.6 in January and just below the 54.3 measurement in December. Any rating above 50 indicates expansion in the manufacturing sector. Of 18 industries surveyed for the Index, 16 reported growth.
“Comments from the panel reflect continued expanding business strength, supported by notable demand and output, although both were softer than the prior month,” the chairman of the institute’s Manufacturing Business Survey Committee said.
Consumer confidence improved sharply in February, with The Conference Board’s Consumer Confidence Index increasing to 131.4, up from 121.7 in January. February’s gains, though, followed three straight months of declines.
“Looking ahead, consumers expect the economy to continue expanding,” the board’s senior director of economic indicators said. “However, according to The Conference Board’s economic forecasts, the pace of expansion is expected to moderate in 2019.”
The University of Michigan’s Index of Consumer Sentiment increased four points to 97.8 in March. This was 3.6 points below the March 2018 level. Researchers noted that sentiment improved among respondents with incomes in the lower two-thirds of the population but dipped among the richest one-third.
“Since households with incomes in the top third account for more than half of all consumer expenditures, cautious observers will conclude that the latest data are another indication that the end of the expansion is on the distant horizon,” the survey’s chief economist said.
Housing starts in January grew 18.6 percent from December, but were 7.8 percent below the January 2018 level, the Census Bureau and the Department of Housing and Urban Development reported.
Existing home sales fell 1.2 percent in January, marking the third straight monthly decline, according to the National Association of Realtors.
“Existing home sales in January were weak compared to historical norms; however, they are likely to have reached a cyclical low,” the association’s chief economist said. “Moderating home prices combined with gains in household income will boost housing affordability, bringing more buyers to the market in the coming months.”
The Dow Jones Industrial Average closed February at 25,916, up 11.1 percent year to date. The S&P 500 Index also gained 11.1 percent through the first two months of 2019, ending February at 2,784.49.
The U.S. dollar closed February trading at 0.88 euros, 0.75 pounds, 111.39 yen and 6.69 yuan.
Last year may have been the last, best chance for the economy to hit 3 percent annual growth for a while. Few people outside of the administration consider that level of expansion to be a realistic possibility this year, especially since Q1 growth will likely be around half that. Given the effects of the trade war, economic slowdowns in China and other countries, and political turmoil here at home that makes another government shutdown a not unlikely event later in the year, the nation’s GDP probably will not be able to sufficiently make up for a mediocre January, February and March, and the soon-to-be longest expansion in American history will remain the only one since World War II never to have recorded 3 percent growth for a full year.
