US growth remains solid while global growth weakens. The world economy awaits resolution to festering US-China trade issues.
The US economy grew by 3% on a year-over-year basis in the third quarter. This is close to some of the strongest gains seen in the nearly decade-long expansion. Fiscal stimulus, including deficit-financed tax cuts and government spending increases, have helped accelerate growth and will continue to assist the economy through much of next year.
The composition of GDP growth in the third quarter was not as robust as in prior quarters. Excluding the impact of inventories on GDP, Real Final Sales rose only 1.2% after rising an outsized 5.4% in the second quarter. An average of the middle two quarters of 2018 provides a more accurate view due to inventory adjustments brought on by tariffs. Overall, near-term growth prospects remain positive.
Evidence of strength in the economy is widespread. Unemployment, which peaked at 10% in late 2009, is currently at 3.7%. Personal Income in the third quarter grew by 2.7% year-over-year. Corporate profits were especially strong over the same period, advancing 10.3%. House prices have reached record levels, surpassing the prior high in early 2006. Household debt burdens have declined to historical lows, with the debt-service-payments-to-personal-income ratio under 10%.
With fiscal stimulus supporting growth, it would take a meaningful event to derail the economy. The developing trade war between the US and China is a building threat. Each increase in US tariffs on Chinese imports is being met by corresponding trade restrictions and tariffs on US imports into China. At present, the impact on the economy is small, but should the magnitudes increase as threatened by the Trump administration, it could become material in 2019.
Near-term prospects for consumer spending still look promising
Even with volatility in the financial markets rising into year-end, consumer confidence remains strong. The University of Michigan Consumer Confidence index was unchanged at 97.5 in December. A rise in the current conditions index to 115.2 from 112.3, offset a small decline in consumers’ expectations for the future. Sentiment remains positive from the recent fall in gasoline prices and the continued strength of employment growth. Payroll employment gained 155,000 in November and will keep the unemployment rate on its long-term downward path. With consumer sentiment stable at favorable levels, real consumption growth should hold up well in the near term. Consumer spending in the fourth quarter is expected to be 3%, matching the prior quarter’s growth rate. With the drop back in oil prices giving a boost to disposable incomes, consumer spending is expected to remain upbeat moving into the first quarter of 2019.
Few signs of a slowdown in services and manufacturing
The Institute of Supply Management (ISM) Non-Manufacturing index in November signaled that the economy is still growing at a strong pace. The increase in the headline index to 60.7 from 60.3 is the second highest level in 13 years. All the main components rose including business activity and new orders sub-indexes. Together with the recently reported increase in the ISM Manufacturing index, a weighted average of the two ISM surveys rose to 60.5 in November from 60.0. At that level, the surveys are consistent with GDP growth surpassing 3% in the fourth quarter.
The ISM surveys noted that the main concern for businesses is tariffs where many companies are experiencing steeper input costs and are stockpiling goods because of uncertainty surrounding trade relations. Recent conflicting statements at the G20 summit by the US and China have added to uncertainty. Analysts do not expect the two countries to escalate the conflict, but a trade war remains a significant downside risk. The Trump administration has proved by past actions that to win concessions from China and other countries, it is willing to increase trade pressure.
Entering 2019, global economies look soft
After hitting a 7-year-high of 4.4% in the second quarter, world GDP growth dropped to 3.2% in the third quarter. In advanced economies, the slowdown was broad-based with outright contraction in Germany and Japan. Positive characteristics included continued strong activity in the US and improvement in UK growth. Data for most of the emerging economies were encouraging, but China remains a concern. The Chinese government is trying to manage deleveraging from over-investment while domestic demand slows and the US-China trade war festers.
Global economic conditions are favorable for most economies with full employment and tame inflation in many areas. Global growth is, however, transitioning to a slower pace after being on an upswing for more than two years. Forecasters at Moody’s Analytics expect global growth to slow to 3% in 2019 and 2.7% in 2020 after an expected 3.1% in 2018. The combination of slowing world trade, capacity constraints and moderate tightening in financial conditions are behind the cooling conditions.
Global trade has become an important element to world growth through specialization and productivity growth. Increased protectionism in foreign trade policy has discouraged global trade flow this year, so it is important that the U.S. and China work through their differences. Recent negotiations between President Trump and Chinese President Xi Jinping have averted a sharper slowdown in US-China trade at the start of the 2019 year. The stage is now set to cement a lasting deal between the two that will expand global trade and help strengthen the world economy.
Sources: Moody’s Analytics, Capital Economics, Cornerstone Macro, The NY Times, The Wall Street Journal, Federal Reserve Bank of St. Louis, University of Michigan Survey of Consumers, Institute of Supply Management, Bureau of Economic Analysis
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