Market participants’ evaluation of increasing policy uncertainty has contributed to sharp equity market declines over the last quarter. The list of issues raising concerns has been broad: the Federal Reserve (Fed); trade policy; looming Brexit deadlines; lack of a fiscal response to slowing growth abroad; worries about a slowing fiscal impact at home; tightening labor markets; partisan political bickering; a government shutdown; and executive branch turnover, to name a few. We don’t believe that any of these factors individually is currently a serious threat. Collectively, they have tipped market sentiment toward a brooding sense of uncertainty.
But while the downside risks are real, these concerns have had little impact on aggregate hard economic data to date: U.S. growth expectations for 2019 have been holding steady, and global growth expectations have declined only modestly. The overall economic context still points to moderate growth and overall stability in 2019.
FORECASTS HOLDING STEADY
Looking back over the last year, we see that global growth forecasts for 2019 have not shifted significantly. We surveyed a range of institutional economic forecasts for 2019, and compared forecasts made at the end of 2017 with the same forecasts at the end of 2018. They all told a similar story. A typical case: Organization for Economic Cooperation and Development (OECD) forecasts from November 2017 and November 2018 saw 2019 global growth expectations falling just 0.1% [Figure 1]. That’s a small decline but not insignificant on a global scale, although concerns about downside risks have increased. 2019 expectations for the U.S. actually picked up over the same period. And 2018 followed suit. 2018 growth was in line with the 2017 forecast, with an upside surprise in the U.S. offsetting downside surprises in other developed markets.
UPSIDE PROSPECTS IN THE UNITED STATES
Even though uncertainty has clouded investors’ horizons as of late, we still believe the U.S. economic landscape is compelling. In 2019, we expect U.S. gross domestic product (GDP) growth of 2.5–2.75%, near consensus but with an upside bias. While slower than the near 3% growth expected for 2018 (with fourth quarter numbers still to come), it’s still above the 2.3% average growth for the expansion and well removed from recession.
We see several drivers of continued abovetrend growth next year. Overall, we believe the combination of lower individual and business tax rates, immediate expensing provisions in the tax law, repatriation, reduced regulation, and increased government spending will help support business and consumer spending. These factors should more than compensate for slowing global growth, disappointing housing growth, and uncertainty from trade and budget deficits.
A key to our forecast is a pickup in capital expenditures (capex), which we think will be aided by steady corporate profit growth and fiscal incentives for business spending. Despite a second-half slowdown, business spending was robust in 2018, and surveys suggest that capex may grow at a solid rate of about 7% in the year ahead. Increased capex may help lay the foundation for improved productivity, which will be important in 2019, as rising output per worker helps offset inflationary pressures. We also expect current consumer patterns to persist as wages continue to grow at a healthy pace and low tax rates buoy spending.
While inflation concerns may surface at times, we expect inflationary pressures to remain at manageable levels next year. We’ll continue to watch wage growth closely to gauge the state of inflation, as it’s hard to have a sustainable inflationary threat without the participation of wages. With wage growth trending near 3% annually, we believe there is still plenty of time before the economy overheats, and we see no signs of wages and prices slipping into deflationary territory.