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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

Will 2018 Meet Expectations?

Will 2018 Meet Expectations?

By Greg Sitek

The future of the U.S. is shrouded in confusion, hostility, distrust, threats, uncertainty, criticism, discord, disasters, failing infrastructure, and an almost endless list of problems. But even so, we are experiencing a growing economy high employment rates, low inflation rates, strong housing market and an equally long list of positive things.

The U.S. ended 2017 with having a string of hurricanes – Harvey, Irma, Jose, and Maria – that caused around $200 Billion dollars in damages only to be followed by a season of fires that destroyed thousands of homes, building, thousands of acres of forests and intensified the stress on an exhausted infrastructure.

Thanks to the thousands of people who have and continue to pitch in with physical help, equipment, materials and supplies hurricane recovery and rebuilding is underway but will take years to accomplish. Groups like Team Rubicon and other veteran organizations along with donations of money and equipment by manufacturers, trade association, dealers, individuals and so many others have made it possible to push ahead with what is an overwhelming task. Healing is always a slow process.

In addition to the tests thrown at us by Mother Nature, we have had a cascade of political and social speed bumps adding hazards as we travel our road into the future slowing the forward momentum and intensifying the risk.

We know what 2017 was like. What can we expect for 2018 and beyond?

Economic forecasting is always tricky and unlike weather forecasting more critically important, especially for the forecaster. We’ve all heard the comment, “Being a weather forecaster is the only job where you can be wrong most of the time and not get fired.” This doesn’t apply to the economists who look at the conditions that are, that were and that will be.

Predictions for 2018 tend to be positive with most economists confident that we will sustain continued and improved national economic growth. I haven’t heard any of them forecasting a recession in the immediate future – the next six months and beyond.

We have included construction industry forecast from leading resources: Wells Fargo Economics Group, American Road & Transportation Builders Association (ARTBA) and Associated Builders & Contractors (ABC). There are many others who do an excellent job of industry forecasting.

On that I wish we could have included but didn’t have room is:

Dodge Data & Analytics (https://www.construction.com/) recently released its 2018 Dodge Construction Outlook, a mainstay in construction industry forecasting and business planning. The report predicts that total U.S. construction starts for 2018 will climb 3% to $765 billion.

“The U.S. construction industry has moved into a mature stage of expansion,” stated Robert Murray, chief economist for Dodge Data & Analytics. “After rising 11% to 13% per year from 2012 through 2015, total construction starts advanced a more subdued 5% in 2016. An important question entering 2017 was whether the construction industry had the potential for further expansion. Several project types, including multifamily housing and hotels, have pulled back from their 2016 levels, but the current year has seen continued growth by single-family housing, office buildings, and warehouses. In addition, the institutional segment of the nonresidential building has been quite strong, led especially by transportation terminal projects in combination with gains for schools and healthcare facilities. As for public works, the specifics of a $1 trillion infrastructure program by the Trump Administration have yet to materialize, so activity continues to hover around basically the plateau for construction starts reached a couple of years ago. Total construction starts in 2017 are estimated to climb 4% to $746 billion.”

“For 2018, there are several positive factors which suggest that the construction expansion has further room to proceed,” Murray continued. “The U.S. economy next year is anticipated to see moderate job growth. Long-term interest rates may see some upward movement but not substantially. While market fundamentals for commercial real estate won’t be quite as strong as this year, funding support for construction will continue to come from state and local bond measures. Two areas of uncertainty related to whether tax reform and a federal infrastructure program get passed, with their potential to lift investment. Overall, the year 2018 is likely to show some construction project types register gains while other project types settle back, with the end result being a 3% increase for total construction starts. By major sector, gains are predicted for residential building, up 4%; and nonresidential building, up 2%; while nonbuilding construction stabilizes after two years of decline.”

Association of Equipment Manufacturers (AEM) has posted a radio link on its CONEXPO-CON/AGG New update. To hear it you can do so at:

http://www.conexpoconagg.com/visit/conexpo-con-agg-radio-podcasts/

2018 Wells Fargo Forecast Highlights

Wells Fargo Reports: Housing Construction Continued to Strengthen in November

Housing starts rose 3.3 percent in November to a 1.297 million-unit pace after a downwardly revised 1.256 million-unit pace in October. Strength in the West and South pushed single-family starts to a decade high.

Residential Building Up in the South and West

  •  Revisions pushed some of the building activity first reported in October into November. Housing starts were at a 1.297 million- unit pace in November and single-family building reached a new cycle-high of 930,000 units.
  •  Residential starts were up in the South and West, but declined in the Midwest and Northeast. Multifamily was behind the slowdown in the Northeast, which has seen completions surge.

Residential Investment to Still Boost Q4 GDP

  • Revisions post-storm pushed the bulk of building activity into November. The building trend is clearly on the rise, particularly compared with earlier this year. Solid readings for both October and November bode well for Q4 GDP growth.
  • Construction is likely to strengthen further in coming months. The latest NAHB/Wells Fargo survey of homebuilders posted solid gains in December, reaching its highest level since 1999.

Wells Fargo Reports: New Home Sales Surge in November

 

New home sales surged 17.5 percent to a 733,000-unit pace. Sales for prior three months were revised lower, however. Even with the revisions, the three-month trend still shows new home sales clearly strengthening.

New Home Sales Are Ramping Up

  • Drawing firm conclusions from the housing data this time of the year are often perilous, as the seasonal adjustment process normally makes huge corrections to the underlying data, which typically slow this time of year. This year, however, sales have risen, reflecting both stronger economic growth and unseasonably mild winter weather. Development activity has also ramped up, giving builders a little more inventory to sell.

Homebuilders Have A Good Reason to be Optimistic

  • The strength in sales is not surprising. Homebuilder confidence has surged, as buyer traffic and sales ramped up.
  • The South and West accounted for the bulk of November’s increase, with sales in the West surging 31.3 percent.
  • The greatest limitation to home sales continues to be a lack of inventory. With few completed homes available, sales of homes not yet started accounted for most of November’s increase.