The Lurking X-Factors

U.S. economic growth will continue this year — and might set a record for longevity — but emerging imbalances threaten to slow momentum.

By Robert A. Dye, Ph.D.

The current economic expansion is the second-longest in U.S. history. The nation’s economy has expanded for 114 consecutive months, from July 2009 through December 2018, trailing only the 120 month-long period during the 1990s.

The length of the current business cycle begs the question: Are we due for a recession in the near future? As former Federal Reserve Chairwoman Janet Yellen said, “Expansions don’t die of old age,” meaning that there is no technical reason why the current expansion must end. But there’s a corollary to Yellen’s quote: Expansions don’t die of old age; however, as they evolve, imbalances build up that can cause the next recession. As a result, an economic outlook for 2019 should begin with a review of last year, to see where imbalances might be building up.

2018 was a good year for the U.S. economy, with nearly 2.9 percent estimated annual growth in real gross domestic product (GDP). Real GDP growth was 2.2 percent in the first quarter, which featured federal tax reform, strong hiring and the first of four Federal Reserve interest rate hikes for 2018. Trade wars began to heat up, and the midterm elections added to a growing sense of uncertainty for many businesses.

The second quarter brought real GDP growth of 4.2 percent, as business investment and consumer spending increased. Inventories were a drag on second-quarter real GDP, but net exports added as much to growth as inventory contraction subtracted. The Federal Reserve increased the benchmark fed funds rate 25 basis points in June. Hiring remained strong, and the unemployment rate fell below 4 percent in April.

Third-quarter real GDP growth eased to a still-respectable 3.4 percent. But there were signs that economic growth could slow further in 2019. The Federal Reserve continued with “gradualism,” hiking interest rates again in September. Borrowing costs increased for both commercial and household borrowers, and business investment was flat in Q3. The housing market showed signs of cooling. Trade uncertainty was reduced by the announcement of the new U.S.- Mexico-Canada Agreement, which still must be ratified by the three countries. However, tensions between the U.S. and China increased, as the Trump Administration threatened to raise tariffs on many products.

In the fourth quarter, business confidence remained strong, but the stock market began to slip in October and remained volatile through December. Evidence of a cooler global economy contributed to stoke market volatility. After economic growth slowed in the European Union (EU) in the third quarter, many international organizations lowered EU growth forecasts for 2019. Economic indicators from China soured as trade pressure from the U.S. hit the export-sensitive Chinese economy. In the U.S. midterm election, Democrats won control of the House of Representatives, while Republicans retained control of the Senate. The Fed delivered another 25 basis-point interest rate hike in December.

In 2019, many of the forces that shaped the U.S. economy last year will continue, and some will change. A breakdown of U.S. GDP offers insights on where vulnerabilities are. Economists view GDP as a confluence of streams in the U.S. economy: (1) consumer spending, (2) business investment, (3) residential investment, (4) international trade and (5) government spending.

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