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Wells Fargo 2019 Economic Outlook

Webcast replay information and YouTube video

A replay of our 2019 Annual Economic Outlook Webcast and a short YouTube video about our outlook are now available.

As the current economic expansion approaches the longest on record, we consider just how much longer the good times can last. Our base case sees the economy continuing to expand, albeit with some slowing, through 2020. But we also note factors that could either prolong — or derail — this expansion over the next couple of years.

Watch the Replay

A replay of the webcast will be available through January 13, 2019. Additional materials are available at wellsfargo.com/economicoutlook.

https://www.wellsfargo.com/com/insights/economics/annual-economic-outlook

Executive Summary 

Records Are Made to Be Broken 

The economic expansion that began in June 2009 has been in place now for 114 months, making it the second longest U.S. economic upswing on record. Although we expect real GDP growth will slow somewhat from the rate that will be achieved in 2018 (nearly 3%), we forecast that the expansion will remain intact through 2020. 

We forecast that the expansion will remain intact through 2020. 

Real GDP growth in 2018 has been boosted, at least in part, by economic policies. The tax cuts that President Trump signed into law in late 2017 have helped to raise real disposable income, which has supported strong growth in real personal spending. In addition, last year’s budget agreement provided a lift to government spending, which has also made a positive contribution to real GDP growth. Although the Federal Reserve has been hiking rates, monetary policy is still accommodative, at least it was earlier this year. 

However, some of the factors that have contributed to strong economic growth this year are beginning to fade. The income-lifting effects of the tax cuts will dissipate in 2019, which should lead to some deceleration in real personal consumption expenditures. Growth in real government expenditures is also set to slow. Higher interest rates appear to have weighed on the housing market recently, and the Fed is probably not completely done yet with its process of removing policy accommodation. 

That said, the economy has strong momentum behind it at present, which should keep the expansion intact. Business confidence is buoyant, thereby underpinning investment spending and employment growth. Real consumer spending should be supported by continued growth in real disposable income, upbeat confidence and record levels of household wealth. The high personal saving rate gives households the financial ability to maintain solid rates of spending growth. 

Unemployment has receded to its lowest rate in nearly 50 years, which has led to some acceleration in wages. Modest rates of wage inflation are putting some upward pressure on rates of consumer price inflation. Consequently, the Federal Reserve has been gradually removing policy accommodation, and we look for further tightening ahead. We expect that the Federal Open Market Committee (FOMC) will lift its target range for the fed funds rate by 25 bps at its next policy meeting on December 19, and we forecast that the FOMC will hike another 50 bps in 2019. 

It Is the Best of Times, It Is the Worst of Times 

Could the good times last even longer than we anticipate? Yes. Recessions tend to occur when excesses get built up during the boom years and then are subsequently reversed when risk tolerances shift due to a policy mistake or an exogenous shock. The most striking feature of the current expansion is the absence of any obvious excesses. As noted above, inflation has crept higher recently but a return to 1970s-like rates of inflation seems to be a remote possibility. Therefore, the Fed probably does not need to jam on the brakes, which can prolong the expansion. 

A stronger rate of potential GDP growth could be another elixir to the longevity of the expansion. Reduced marginal income tax rates could be drawing more people into the labor market, and corporate tax reform could potentially lead to a sustained acceleration in capital spending. Stronger labor force growth and acceleration in capital investment would lift the economy’s potential growth rate. If the economy’s speed limit is actually higher than most analysts currently estimate, then inflation should remain generally quiescent, reducing the risk of a policy mistake by the Fed. 

There are some credible downside risks to our forecast that should be kept in mind. 

But there are also some credible downside risks to our forecast that should be kept in mind. Although inflation has generally remained benign, it could conceivably rise more rapidly in the coming months if wages accelerate further due to tightness in the labor market. In that scenario, the FOMC could end up tightening policy too forcibly. Trade tensions between the United States and China have risen this year. Although the “first order” effects of the trade war do not appear to be large enough to derail the U.S. expansion, “second-order” effects on investment and consumer spending could be more meaningful. Furthermore, there has been broad asset price appreciation in recent years, and a significant selloff in asset markets could weaken confidence and erode household wealth. Authorities are not in the best position to fight a downturn, should one occur. The Fed does not have as much conventional “ammunition” as it usually does before a recession (i.e., the fed funds rate generally remains low). The federal government’s deficit is already on its way to more than $1 trillion, limiting its ability to loosen fiscal policy further to offset economic weakness.

Global Growth Set to Slow Somewhat 

We estimate that global GDP has risen 3.7% in 2018, which would make it the strongest year of global GDP growth since 2011. But, we look for some deceleration in the global economy in 2019. As discussed previously, U.S. GDP growth should slow somewhat throughout the next year. But we also look for slower growth in China, the world’s second-largest individual economy, due, at least in part, to the “trade war” with the United States. We forecast that the Japanese economy will also decelerate a bit in 2019, although the pace of economic activity in the Eurozone and in the United Kingdom should hold up reasonably well. A “disorderly” Brexit and political tension between the Italian government and the European Commission represent possible downside risks to our forecast, but we anticipate that both issues will be resolved. 

The trade-weighted value of the U.S. dollar against other major currencies has risen about 5% on balance since the beginning of the year. The strength of the U.S. economy relative to most other major economies has led the Federal Reserve to hike rates at a faster pace than other major central banks, thereby supporting the greenback. But, we expect that many other major central banks will start to catch up to the Fed next year. This “monetary policy convergence” should lead to dollar depreciation vis-à-vis most other major currencies in 2019. We expect that the greenback’s performance will be generally mixed against emerging market currencies next year. 

For the full Wells Fargo 2019 Economic Outlook visit:

https://apps.email.wellsfargosecurities.com/e/er?s=2044561710&lid=8679&elqTrackId=432c5b6c43634f12b186be173ab75268&elq=27ef934648d44a3282caff7d6bcc6c70&elqaid=4415&elqat=1

ARTBA Reports: U.S. DOT Announces $1.5 Billion in New Transportation Grants

Secretary Chao, center, Dec. 11 announced the BUILD grants at U.S. Department of Transportation (USDOT) headquarters in Washington, D.C. She was joined by U.S. Senate Appropriations Subcommittee on Transportation, Housing &Urban Development (THUD) Chair Sen. Susan Collins (R-Maine) and ranking member Sen. Jack Reed (D-R.I.), House Appropriations THUD Subcommittee Chair Rep. Mario Diaz-Balart (R-Fla.) and ranking member Rep. David Price (D-N.C.), and Youngstown, Ohio, Mayor Jamael Brown.

By Eileen Houlihan, senior writer/editor, ARTBA

U.S. Transportation Secretary Elaine L. Chao Dec. 11 announced $1.5 billion in discretionary grant funding to 91 projects in 49 states and the District of Columbia. The grants are made through the Better Utilizing Investments to Leverage Development (BUILD) Transportation Grants program and support road, rail, transit, and port infrastructure projects across the country.

Two-thirds of the projects involve roads. Some of the biggest awards include completing a 4.8-mile, four-lane interstate facility in southwest Missouri that will bypass US-71 and connect to Interstate 49 in Arkansas; repairing and upgrading approximately 3.5 miles of high-use service roads in the Lower Yukon River Regional Port in Alaska; extending the Hot Springs East-West Arterial Bypass in Arkansas; building improvements on approximately 9 miles of State Road 19 in Mississippi; and replacing approximately 77 bridges in 17 rural counties in North Carolina.

The grants will contribute to the construction or refurbishment of over 200 bridges nationwide, from North Carolina to the refurbishment of the Brooklyn Bridge. See the full list of projects.

BUILD grants were known previously as TIGER grants. The maximum grant award is $25 million for a single project, and no more than $150 million can be awarded to a single state. There is a $5 million minimum award for projects located in urban areas and a $1 million minimum for rural projects.

Tom Ewing’s Environmental Update

*  Price points.  French gas prices during the Yellow Vest chaos were about $1.53/liter on the day I checked; a US equivalent of $5.78/gallon.  Gas in my area dropped to $1.98/gallon, about 52¢/liter.  Around the same time, Yahoo! News reported that an Exxon, Hess, and NCOOC off-shore exploration project confirmed the discovery of 5 billion barrels of recoverable oil, with exploration continuing.  Estimated recovery cost: $35/barrel (in the ocean!).  In other words, cheap oil, just about forever.  I like how Hamlet said it: “There are more hydrocarbons recoverable on Earth, Horatio, Than are dreamt of in your philosophy.”  Value is frequently judged by how much people will pay for something, and then they won’t.  Value is hard to assess with grand, singular cultural creations and monuments; you know, maybe like what’s the value of the Arc de Triomphe, damaged during the French protests?  Now it’s clear: The treasures of France are not worth $5.78/gallon.  If gas costs less, they stay.  If it costs more, the Arc and all that old stuff va être brûlé au sol!
*  On Friday, the Bureau of Ocean Energy Management (BOEM) announced the availability of the Draft Environmental Impact Statement (EIS) for “the Construction and Operation Plan (COP) submitted by Vineyard Wind LLC (Vineyard Wind).” The Draft analyzes potential environmental impacts of the proposed Vineyard Wind project and reasonable alternatives. The Notice starts the public review and comment period and it presents the dates and locations of public hearings.  The project would install up to 100 wind turbine generators, each with a capacity of between 8 and 10 MW in an area approximately 12 nautical miles from the southeast corner of Martha’s Vineyard and a similar distance from the southwest side of Nantucket.  The comment period ends January 22, 2019.
*  Update: I asked the MA’s Governor’s office about The Commission on the Future of Transportation in the Commonwealth Report, noted last week to be late; it was due by December 1.  “No specific date can be conveyed today,” a staff person wrote back, “please feel free to check back with me next week.”  This really isn’t about one more state transportation report.  I mean, you could rebuild the Taj Mahal with state transportation reports printed and filed over the last decades.  There are two bigger issues: one, missed deadlines devalue the work.  “It’s just not that important” is the signal from the top, about issues supposedly undertaken in the public’s interest.  Second, although apparently not likely with this work, what about the people who need the report so they can make next-step decisions?  Isn’t their time worth anything?  A web page note would be thoughtful, e.g., “Sorry, the report’s delayed!  Late comments deserve a careful review!  Thanks for understanding!”  The message now? “Get over it, peons, you’re just so not worth it.”
Tom Ewing
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ARTBA Report to Congress Says Raise the Gas Tax to Address Interstates

By Eileen Houlihan, senior writer/editor, ARTBA

Congress should legislate an Interstate Highway System renewal and modernization program that focuses on reconstructing the aging and heavily-used infrastructure and pay for it in the near-term by increasing the federal gas tax, a new report to Congress says.

The “Renewing the National Commitment to the Interstate Highway System: A Foundation for the Future” report, released Dec. 6 by the National Academies of Sciences, Engineering and Medicine’s Transportation Research Board (TRB) and funded through the 2015 FAST Act surface transportation law, also calls for adjusting the federal fuel tax as needed to account for inflation and changes in vehicle fuel economy.

The report did not address a specific amount to raise the federal fuel taxes, but noted the current level of spending on the Interstates at $20 billion to $25 billion annually is “much too low – by at least 50 percent – to proceed with long-deferred rebuilding of the system’s aging and deteriorating pavements and bridges.” The committee said more than $30 billion per year is needed over the next 20 years to just repair and rebuild existing damage, and an additional investment of approximately $45 billion to $70 billion per year will be required to expand and manage the system’s capacity to handle future traffic.

It recommends lifting the ban on tolling of existing Interstate highways, a “rightsizing” of the system to address current and emerging demands and to remediate economic, social and environmental disruptions caused to some communities by the system, and address concerns about climate change and accommodate automated vehicles.

“As the nation moves further into the 21st century and as transformations, in the vehicle fleet and vulnerabilities due to climate change place new demands on the country’s transportation infrastructure, the prospect of an aging and worn Interstate Highway System that operates unreliably is concerning,” the report noted. The Interstate Highway System is a vital part of the U.S. economy. It is the foundation of the National Highway System (NHS) – which includes ties to ports, airports and other major intermodal transportation facilities.  Although the NHS represents just 4 percent of public roads, it carries more than 40 percent of the nation’s highway traffic and 70 percent of the truck freight traffic that moves people and goods across the country.

The report added that when much of the Interstate system was built in the 1960s and 1970s, little was known about the threat of climate change. The report recommends transportation agencies across the country make changes to how they plan, design, construct operate and maintain the system to make it more resilient and less vulnerable to the effects of climate change.

In addition, Senate minority leader Chuck Schumer (D-N.Y.), in a Dec. 7 op-ed in The Washington Post, said “any infrastructure bill that wants Democratic support in the Senate” will have to include policies and funding that help transition the country to a clean-energy economy and mitigate the risks the U.S. faces from climate change.

TRB’s 14-person committee to research the Interstate report included 2006 ARTBA Chairman Dr. Michael Walton of the University of Texas at Austin.

Walton, who spoke during a webinar at the TRB release of the report, said much of the funding and financing question will vary by state, citing, for example, tolling. “What works in one state may not in others,” Walton noted. The original Interstate highway construction program was a collaborative commitment among the states and the federal government. A comparable partnership is needed to ensure resiliency and respond to the changing demands of users, the report said.

ARTBA economic data continues to show that federal funds on average provide more than half of all annual state department of transportation capital outlays for highway and bridge projects.

NEW CAT® D6 DEBUTS WORLD’S FIRST HIGH DRIVE ELECTRIC DRIVE DOZER

TOP GRADING PERFORMANCE, FUEL EFFICIENCY GAINS

The all-new Cat® D6 dozer delivers new levels of efficiency and performance with a choice of Electric Drive or Fully Automatic power train. A redesigned purpose-built VPAT dozer offers best-in-class grading, while updated technology features help operators to be more productive from first pass to finish grade. Customer profitability is enhanced with up to 35% better fuel efficiency and reduced service and maintenance costs. An all-new cab resets the standard in comfort, while a range of configuration choices helps customers optimize machine performance for business needs.  At 215 hp (161 kW) and an operating weight range of 47,949 – 53,126 lbs (21 749 – 24 097 kg), the new D6 replaces the versatile D6T bulldozer.

Advanced Power Train Choice

This next-generation dozer offers a choice of advanced powertrain: the D6 XE with Electric Drive or the D6 with a fully automatic 4-speed powershift transmission.

The D6 XE is the world’s first high drive Electric Drive dozer, offering up to 35% better fuel efficiency and increased agility compared to the previous 3-speed model D6T. Constant power to the ground, continuous push, and greater maneuverability mean faster cycle times, making Electric Drive a top choice to achieve the highest level of productivity and fuel efficiency. Added D6 XE productivity and reduced fuel cost mean customers looking for these benefits can expect to see a payback of the added investment over a D6 in less than two years.1

The D6 XE features a next-generation Electric Drive system that offers high performance along with added durability. Simplified diagnostics and the serviceability advantages of a high drive dozer help reduce service and maintenance costs.

The D6 is powered by a 4-speed fully automatic transmission that provides increased productivity and up to 20% better fuel efficiency versus its 3-speed predecessor. The fully automatic D6 reduces momentary hesitation when the traditional machine shifts, so more momentum, and drawbar power are maintained through the entire push. Caterpillar engineers designed the auto shift to work up and down the entire working range, so power to the ground and fuel consumption are optimized for a greater percentage of the time. An added gear between first and second ensures more seamless shifting.

Both powertrains offer unprecedented ease of operation. The operator simply sets the ground speed and the dozer continuously optimizes for maximum power and efficiency based on load. With Electric Drive, there are no gears to shift. The fully automatic 4-speed powertrain optimizes the transmission without the operator having to worry about shifting.

Better, Faster Grading

Finish jobs faster by grading at higher speeds with a new purpose-built Variable Power Angle Tilt (VPAT) dozer. The newly designed structure is stronger, yet lighter, so machine balance is optimized for grading without the need for a rear implement or counterweight. A wide-gauge LGP VPAT design, with 36” centered shoes, puts more track on the ground to achieve 5 psi (0.73 kPa) ground pressure. Wider VPAT blade and class-leading range of motion improve performance, especially in trenching and backfilling applications. A new optional finish grading undercarriage has 10 bottom rollers for smoother grades at higher speeds, even in difficult surfaces like sand and gravel.

Technology Choices for Your Business

Increase overall job site productivity by up to 50 percent with a choice of Cat Connect GRADE technologies. Technologies range from standard Slope Indicate to full factory-integrated GPS, all supported by Caterpillar and Cat dealers.

  • Technology offerings on the D6/D6 XE are led by an updated, factory integrated Cat GRADE with 3D system. The new 10-inch touch screen offers a more intuitive operator interface that works like a smartphone, making it easy for operators to pick up quickly. The system uses advanced Inertial Measuring Units (IMU), which provide greater speed and accuracy without position sensing cylinders. Smaller antennas are integrated into the cab roof for even better protection. AutoCarry™ is included with Grade with 3D to automate blade lift to maintain desired blade load, improving load consistency and reducing track slip.

Additional GRADE technology choices include:

  • Cat Slope Indicate is standard, showing the machine cross-slope and fore/aft orientation on the primary monitor for quick and easy reference.
  • Cat GRADE with Slope Assist™ provides basic blade positioning assistance without the need for added hardware or a GPS signal.
  • Factory Attachment Ready Option (ARO) provides optimal mounting locations, brackets, and hardware and simplifies installation of an aftermarket grade control system. The new D6/D6 XE makes it easier to install any brand of grade control system, with specific mounting locations for grade control components. The position of the main display and grade control display can be swapped so operators can choose their preferred location.

Cat LINK telematics technology helps take the complexity out of managing job sites – by gathering data generated by equipment, materials, and people – and serving it up in customizable formats.

  • Product Link™ collects data automatically and accurately from equipment assets – any type and any brand – which can be viewed online through web and mobile applications.
  • Access information anytime, anywhere with VisionLink®. Cat dealers can help configure a customized subscription, available with cellular or satellite reporting or both.

Greater Durability, Reduced Service and Maintenance Costs

The new D6/D6 XE is designed specifically to reduce service and maintenance costs by up to 12 percent, with updated components, longer service intervals, and fewer scheduled maintenance tasks. Easy access to grouped service points and regular maintenance items, plus a new ladder at the back of the machine, help reduce time spent on routine maintenance and inspection.

Undercarriage updates are designed to save money and maximize service life. A new Heavy Duty Extended Life undercarriage features Positive Pin Retention pins and link improvements for up to 20% more seal life in high impact conditions. Common structures for Heavy Duty and SystemOne™ undercarriage enable changes from one to the other.

A new Cat C9.3B diesel engine has a redesigned fuel system that provides greater durability and more accurate fuel delivery. Elimination of the NOx Reduction System and a simplified single engine Electronic Control Module (ECM) help increase reliability.

New Standard in Cab Comfort

A completely redesigned cab raises the standard in comfort and productivity. A brand new 10-inch touchscreen display provides an easy-to-use operator interface. The standard air suspension seat is wider with added backward adjustment, plus the entire armrest adjusts independently of the seat for customized comfort. Heated/cooled leather seat options are available, and all offer a variety of seat adjustments to customize cushion length, headrest position, lumbar support and seat tilt. More storage spaces have been added throughout the cab.

The new dozers are easy to operate too – with Electric Drive or the Fully Automatic powertrain, operators just need to set the ground speed and go. The machine optimizes performance and efficiency with no added shifting required. Agile turning, especially on the D6 XE, means faster cycle times and more able to work in smaller spaces.

Distributed cab heating/cooling, with automatic temperature and blower control, circulates air more effectively around the operator. Less air directed toward windows helps reduce fogging/frosting. Integrated ROPS and 15% more overall glass area help increase visibility.

Equipped for the Job

The D6/D6 XE is available in VPAT or push-arm configurations with standard or two widths of Low Ground Pressure (LGP) undercarriage. A variety of blade types, track shoe widths and rear attachments enable the machine to be optimized for primary types of work to be done. Waste Handling and Forestry arrangements also are available, equipped from the factory with specialized guarding, seals and other features to help ensure long life in harsh applications.

D6 / D6 XE SPECIFICATIONS

Engine Cat C9.3B
Power Train Electric Drive or Fully Automatic 4-Speed
Emissions U.S. EPA Tier 4 Final, EU Stage V, Korea Tier 4 Final

 

Net Power Rated (D6 2,200 rpm / D6 XE 1,700 rpm)
ISO 9249/SAE J1349 161 kW 215 hp
ISO 9249/SAE J1349 (DIN) 219 hp
Operating Weight D6 D6 XE
Standard (24 in/610 mm shoe) 21 749 kg / 47,949 lb 22 021 kg / 48,549 lb
LGP (30”) (30 in/760 mm shoe) 22 049 kg / 48,611 lb 22 322 kg / 49,211 lb
LGP (36”0 (36 in/915 mm shoe) 23 333 kg / 51,441 lb 23 605 kg / 52,041 lb
VPAT (24 in/610 mm shoe) 22 704 kg / 50,053 lb 22 976 kg / 50,653 lb
LGP (30”) VPAT (30 in/760 mm shoe) 23 188 kg / 51,122 lb 23 461 kg / 51,722 lb
LGP (36”) VPAT (36 in/915 mm shoe) 23 825 kg / 52,526 lb 24 097 kg / 53,126 lb
Blade Capacity
SU Blade 5.7 m3 / 7.4 yd3
LGP (30”) SU Blade 5.8 m3 / 7.5 yd3
LGP (36”) S Blade 3.8 m3 / 5.0 yd3
VPAT Blade 4.1 m3 / 5.4 yd3
LGP (30”) VPAT Blade 4.5 m3 / 5.8 yd3
LGP (36”) VPAT-Blade 4.9 m3 / 6.4 yd3
For more information about the new D6/D6 XE, please contact your Cat dealer or visit www.cat.com.