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