investment insights
Coming down to earth
In a nutshell
- The US economy delivered significantly above-potential growth in 2018, supported by a tight labour market and stimulative fiscal measures.
- While the 2019 outlook remains constructive, a slowdown is to be anticipated – as tighter monetary policy starts to bite, and the effects of the tax boost subside.
- We forecast 2.6% US GDP growth in 2019, a return closer to earth from the 3%+ levels of the past quarters.
There is little doubt that the US economy ends 2018 with strong cyclical momentum: full-year growth is on track to reach 3% and the jobless rate stands at multi-decade lows. The strength of the labour market is particularly impressive when considering that, despite low unemployment, an average of 210,000 new jobs per month were created this year, for an annual total of some 2.5 million. The economy has benefited from the virtuous cycle between employment, wage growth and consumption, along with a favourable backdrop of healthy risk appetite and an expansionary fiscal stance.
The [US] economy has benefited from the virtuous cycle between employment, wage growth and consumption, along with a favourable backdrop of healthy risk appetite and an expansionary fiscal stance.
Most of these elements are still in place, supporting a constructive 2019 outlook. But simply extrapolating recent trends would be a mistake as some key factors are in the process of changing. Monetary policy is one crucial such factor, bound to dampen growth in coming quarters – especially since we expect the rate hikes to continue well into 2019.
Although the Federal Reserve’s (Fed) stance is not yet particularly restrictive, the policy rate has already risen from 0.5% in late 2016 to 2.25%. Unlike in the earlier stages of the hiking cycle, long-end rates have also moved up substantially, to levels now above 3% (see chart 3). Interest rate-sensitive sectors such as housing are starting to show some strain (see chart 4) – a textbook illustration of the impact of tighter monetary policy. In addition, the broad dollar index strengthened significantly over the course of 2018 – gaining some 10% from its April lows and effectively undoing almost all of the 2017 depreciation.
All told, while US growth prospects remain healthy, a significantly above-potential pace cannot persist forever.
Importantly, the impact of fiscal stimulus, while still growth-supportive, will start to wane in late 2019. With the midterm election results having all but eliminated the possibility of a renewed round of tax cuts, and increased infrastructure spending a rather remote prospect, it is fair to say that the US economy can expect less of a fiscal boost going forward.
All told, while US growth prospects remain healthy, a significantly above-potential pace cannot persist forever. The slowdown that we are projecting, from 3.0% in 2018 to 2.6% in 2019, is a natural step in the cycle. We are getting closer to the point at which the US economy comes back down to earth.
Important information
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