The U.S. economy is expected to slower to its pre-2017 tax cut law level, a federal bank regulator said in its semi-annual risk report for banks and the financial sector, released on Monday.
The Office of the Comptroller of the Currency, the federal bank regulatory agency that released the report, cited blue chip indicators from the American Economic Association, a nonpartisan nonprofit group of economists based in Nashville, Tenn.
That consensus sees annual GDP growth slowing to 2.6% in 2019 and 1.9% in 2020. Annual GDP growth hit 2.9% in 2018, slightly below the Trump administration’s promise of 3% growth.
“Fading stimulus from the [2017] tax cuts, the drag of higher interest rates on housing markets, shortages of skilled workers in some industries, the overhang from rapid growth in corporate debt, global trade and policy uncertainty, and slower growth abroad may temper U.S. economic growth in the next two years,” the OCC concludes in its report.
While the OCC does not forecast a recession in the next two years, the report does note that the Federal Reserve Bank of New York’s modeling sees the possibility of a recession growing over the course of the last year. Instead, the OCC sees the more likely outcome to be that the economy will continue to grow, but at a slower pace than in 2018.
The Federal Reserve Bank of Atlanta, which publicly estimates economic growth in real time, sees the U.S. economy growing at a sluggish 1.2% rate in the second quarter of 2019, down significantly from a first-quarter estimate rate of 2.6%. Economists caution that GDP growth rates can fluctuate significantly from quarter to quarter but are easier to measure on an annual basis.
Some of the forecasting the OCC used incorporated additional tariffs imposed by President Trump that U.S. businesses will have to pay on imported Chinese goods. Separate from the OCC report, analysts at Morgan Stanley said an increased escalation in the U.S.-China trade war could result in a global recession.
The OCC said it remains confident in the health of the U.S. banking system should an unexpected shock or downturn occur, thanks in part to the tax cuts banks saw as a result of the 2017 law, which helped widen their profit margins.
But the regulator of national banks said banks may be making riskier loans, consistent with what often happens towards the end of a business cycle.
“In the credit card space over the last couple of quarters we’ve seen deterioration in credit quality,” said Comptroller of the Currency Joseph Otting on a press call. He added that, combined with some softening in the high-end real estate sector’s performance, as well as riskier business lending mostly done by non-bank companies, could, “sprinkle in a bit into the deterioration of [loan] portfolios.”
Still, Otting said, banks are “holding up very strong for where we are in this late stage in the cycle.”
