By John Gnuschke, Ph.D., Director
Sparks Bureau of Business & Economic Research, The University of Memphis
After eight years of steady but anemic economic expansion, relatively stronger rates of economic growth are expected in 2019 because of the federal tax cut and deficit spending injections of 2018. But, risks loom large and without more fundamental changes in the economy, growth forecasts will gradually revert toward the mean annual increases experienced since the Great Recession ended.
The March Consensus Forecasts - USA© data shown in Table 1 reflect the “as of” March forecasts produced by some of the nation’s best public and private organizations, banks, and corporations, including FedEx. Overall, the consensus of those forecasts indicates that following a strong 2018—less than 3.0 percent real growth, but close to it—the outlook for 2019 is for slightly weaker growth and rising inflationary pressure as real business investments moderate.
No forecast anticipated a recession or dramatic slowdown, although risks do arise for such an event. Factors outside the typical model that reflect unanticipated market disruptions like a trade or real war, stock market declines, or dramatic increases in inflation and interest rates could easily generate out-of-forecast results. An increasing number of forecasts are being revised downward for 2018. To the extent that 2018 economic data fall short of the forecasts and the political turmoil accelerates, consumers and businesses around the globe will begin to question the sustainability of the current expansion. Because of the large number of mostly negative unknowns, the 2019 forecasts will remain possible but increasingly subject to downward revisions.
The longer the forecast period, the more the forecasts tend to reflect long-term growth conditions. Growth of the labor force, increases in human capital, production-altering capital investments, productivity-enhancing management changes, and increases in entrepreneurship are structural changes that enhance long-term growth. Stimulus to the economy from tax cuts and deficit spending is most effective in a weak economic period. In the presence of tight labor markets and years of economic growth, the 2018 stimulus is more likely to increase wage costs, generate modest inflation, and temporarily increase economic growth. The 2008-09 economic disaster was in part associated with an out of control banking system that drove the excesses in the real estate market. After imposing restrictions designed to reduce the financial risks from banking excesses, the restrictions are being reduced. Accordingly, financial excesses of the past have a high probability of returning. Reports of 100% home loans are the leading edge of a push for profits in the real estate sector. Higher interest rates and home sales data make lending in this sector attractive but risky. Any disaster that significantly impacts the economy will spread to or result from the banking sector.
In the long run, the U.S. is facing an economic problem that will only increase as other nations increase their investments in physical and human capital. This nation has made major mistakes in its investment strategies. For example, it needs to re-examine the value of programs that enhance human capital. Falling behind other nations in the generation of high-quality science, engineering, and technology workers will reduce the competitiveness of future generations.
Making massive investments in productivity-increasing infrastructure is essential as part of a larger effort to restore this nation’s economic leadership. But, the most important part of our economic leadership is the quality of our labor force. Growing the labor force through immigration is one way we have been successful. The U.S. has always been a magnet for the world’s best, brightest, and most ambitious workers. But, that position is changing as other nations have enhanced their economic leadership and the U.S. has downplayed the important role immigrants play in this nation. Increasing the quantity and quality of our Human Resources is essential if this nation is to increase its long-term growth and its ability to compete in global markets. Creating a renewed focus on the value of education at all levels is an essential step toward determining the nation’s future.
In summary, the 2018 economic gains may be short lived, due to the unintended consequences of higher inflation and market disruptions associated with higher interest rates. Trade disagreements may accentuate record trade imbalances and will focus more attention on the increasing competitiveness of global markets. Aggressive policy actions toward other nations will disrupt traditional economic markets and generate unknown outcomes for the U.S. and other nations. Most of the outcomes will have a negative impact on the 2019 economic outlook for this country. So, the 2019 economic outlook is for modest growth with some real downside risk.