When watching an unusually exciting football game, I sometimes push the mute button so that I can concentrate on the action on the field. At times, noisy commentary and crowds becloud the game itself, causing one to miss out on some of the more subtle field action.
This is how I feel as I seek to assess the 2019 U.S. economic outlook. There are so many tweets and so much noisy commentary that one can lose sight of what the real economy is doing. It’s time to hit the mute button and see what the facts have to say about 2019’s prospects.
First off, let’s consider economic growth.
As of December, 2018’s real GDP growth seems headed toward 3.0 percent for the year or slightly better. This compares strikingly with 2016’s 1.6 percent and 2017’s 2.2 percent. Driven favorably by tax cuts, relief from regulation, and recently falling energy prices, the trend is definitely positive.
Perhaps more importantly, real per-capita GDP growth is recovering from a recent weak spell, running at 2.3 percent in 2018’s third quarter versus less than 1 percent at the same time in 2016. With some positive wage growth, that proverbial average person is getting better off.
But now we must pause and consider some key forces pushing against our accelerating growth. The last year has seen trade wars, Fed interest rate uncertainty, and Congress’ failure to clarify the status of 800,000 temporarily protected working immigrants who, having come here as children, could be shipped out. Now, as the year comes to a close, the White House is sparking more uncertainty with the Fed. Last week brought abrupt changes in defense policy and more stormy congressional actions involving the federal budget.
If all the mentioned negatives enter the economic mix in full force, they could subtract more than a half-percentage point from a continuation of 2018’s strong growth rate, bringing 2019 closer to 2017’s more frustrating figure.
In short, it is unlikely that 2018’s strong pace of growth will continue. We should look for growth in the year ahead to range close to 2.8 percent at most.
As for consumer activity (think housing, autos, and retail sales) there are some pluses and minuses. On the plus side, the strong labor market and continuing improvements in personal income push retail sales forward. However, higher interest rates, higher housing prices, and hard-hit equity markets reduce consumer willingness to spend. On balance, we should expect reduced housing activity and flat-to-declining auto sales.
Meanwhile, paring down some credit debt and still avoiding significant increases in personal bankruptcy, consumers together should end 2019 with stronger balance sheets.
What about some of the biggest questions from a political standpoint? Will there be employment growth in the year ahead? What about manufacturing?
As 2018 ends, employment growth is at a year-over-year rate of 1.7 percent, having risen somewhat systematically from 1.4 percent in September 2017. With fewer unemployed people and growing immigration constraints, employment growth appears to be about as high as it can get right now. This suggests we will see the 1.7 percent rate continuing, assuming GDP growth remains close to current levels. However, this positive growth is not likely to spur the manufacturing sector, where (probably due to trade war uncertainties) employment has been falling recently.
With the mute button still on, and having waded through the short-term numbers, I still believe we have some serious foundational problems that could affect 2020 and beyond.
The largest of these is the growing and yawning federal deficit, which, when combined with expected higher interest rates, will put a serious squeeze on the availability of funds for government programs and private investment.
A second foundational problem relates to White House leadership efforts to control major elements of economic activity through unilateral executive branch action. This includes not just tariff and trade policy but also undue and uneven influence on private-sector decisions to expand, contract, or relocate investments.
Related to this are White House decisions to lower income taxes while shifting some of the burden to arbitrary pseudo-sales taxes (imposed by way of tariffs on some goods and not others). If the resulting tax system becomes more opaque and therefore less predictable, investors will, at the margin, retrench and place their bets elsewhere.
Taking these short- and long-run concerns into account, we can marvel at the ability of our market-based economy to still yield meaningful growth and prosperity for those fortunate enough to call America home. We have plenty to celebrate. The year ahead should look like a slightly paler version of 2018, but the later years could be weaker.
Bruce Yandle is a contributor to the Washington Examiner’s Beltway Confidential blog. He is a distinguished adjunct fellow with the Mercatus Center at George Mason University and dean emeritus of the Clemson University College of Business & Behavioral Science. He developed the “Bootleggers and Baptists” political model.
