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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.

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.

EQUIPMENT MANUFACTURERS ENCOURAGED BY US-CHINA COMPROMISE ON TARIFFS

Dennis Slater, AEM President

Association of Equipment Manufacturers (AEM) President Dennis Slater issued the following statement today on the recently announced truce between the United States and China on tariffs:

“We hope this builds momentum towards further reasonable agreements to reduce these taxes on Americans and better promote free trade,” said Dennis Slater, president of AEM. “However, the decision also risks extending rather than ending the ongoing uncertainty supplied by the tariffs, creating an unpredictable business environment threatening many of our industry’s 1.3 million jobs.”
Equipment manufacturing company executives have regularly spoken out in response to the Trump administration’s trade policies throughout 2018. Currently, with tariffs on $250 billion on Chinese goods now in place, the Trump Administration has imposed tariffs on about half of the total amount of goods imported into the U.S. from China last year. However, the agreement between President Trump and China president Xi Jinping does not remove these tariffs but just delays a possible decision to extend and increase tariffs on additional goods imported into the U.S.
The ongoing trade war has hurt the profits of many equipment manufacturers, threatening many of the 1.3 million good-paying jobs the industry supports. The tariffs have also had a negative impact on U.S. farmers and ranchers, at a time when many are struggling due to a multi-year slump in income.
AEM is the North American-based international trade group representing off-road equipment manufacturers and suppliers, with more than 1,000 companies and more than 200 product lines in the agriculture and construction-related industry sectors worldwide. The equipment manufacturing industry in the United States supports 1.3 million jobs and contributes roughly $159 billion to the economy every year.

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