Monday, 22 of April of 2019

Economics. Explained.  

Don’t Worry, Be Happy!

April 19, 2019

Next Friday, April 26, first quarter GDP growth will be released.  Estimates of growth for this quarter have swung dramatically as additional data became available.  For example, the widely followed GDPNow estimate produced by the Atlanta Fed started at 0.3% in early March.  As subsequent data were released that estimate has steadily revised upwards.  Today it is at 2.8%.  Nobody knows exactly what growth rate we will see next week.  We project first growth of 1.9%; the consensus forecast is roughly comparable.  We believe that the Atlanta forecast – and forecasts made by other economists – were biased downwards by a belief that the end of the expansion is not that far down the road.  We do not share that view.  The economics profession in general — and readers of this commentary — would be better served by developing a somewhat more upbeat mindset.

How could first quarter growth expectations shift so dramatically?  When the Atlanta Fed forecast was released initially on March 1, most of the hard data for January had been released and those tidbits of information were uniformly weak.  But to make a forecast for the quarter as a whole, economists must make expectations for each economic indicator for February and March.  The only way the Atlanta Fed could produce a growth forecast of 0.3% would be to assume that the January weakness would continue into subsequent months.  They must have been relatively convinced that this was the beginning of the end, and that the economy would slip into recession by yearend.

That expectation turned out to be dead wrong.  The stock market reversed direction and has completely eliminated its fourth quarter decline.  Consumer and business confidence rebounded.  Home sales surged.  Retail sales surged.  Employment rebounded from its anemic February performance.  The trade gap narrowed dramatically in February and shrunk further in March.  As each indicator was released, the Atlanta Fed progressively revised its first quarter growth estimate upwards.  Today it stands at 2.8%.

Clearly, the stock market selloff late last year was both dramatic and scary.  That was followed by the protracted government shutdown which exacerbated the negative sentiment.  But shouldn’t those factors have been regarded as temporary and likely to negatively impact growth for only a relatively brief period of time?  That was our conclusion and we envisioned a snap-back in February and March.  Others apparently saw the situation differently.

We now know that GDP growth in the fourth quarter was 2.2%.  If we end up with, say, 2.0% growth in the first quarter, then the economy will have averaged 2.1% GDP growth in those two quarters despite the stock market selloff and the government shutdown.  That suggests to us that GDP growth in the final three quarters of the year should be more rapid than that.  We expect GDP growth to average 2.9% in those three quarters and growth for the year to come in at 2.7% — not too much different from last year’s 3.0% pace.

The U.S. economy has demonstrated an impressive ability to shrug off bad news.  Think of the obstacles it has overcome during the course of the expansion.  We have had repeated financial crises in a number of European economies, a sharp slowdown in growth in China, anemic growth in Europe,  fear of a nuclear war with North Korea, government shutdowns, a downgrade in the rating of U.S. Treasury debt, a dramatic increase in oil prices which at one point exceeded $100 per barrel and, now, Brexit fears.  Fragile economies do not survive those obstacles.

Why is it so difficult to believe that the U.S. economy is basically healthy and that the factors that tend to produce recessions are nowhere in sight?  Mainstream economists presumably believe the expansion will soon end simply because it is on the cusp of becoming the longest expansion on record.  Therefore, the end of the expansion must be relatively close.

While we do not want to oversimplify a complex situation, the expansion will end once the economy overheats, inflation begins to rear its ugly head, the Fed responds by pushing the funds rate higher from 2.5% today to perhaps 5.0%, and the yield curve inverts.  None of those factors are on the horizon for the foreseeable future.

Bobby McFerrin had it right — “Don’t worry, be happy”.

Stephen Slifer


Charleston, S.C.

GDP, Inflation, and Interest Rate Forecasts

April 19, 2019

The final estimate of GDP growth in the fourth quarter was 2.2% compared to an earlier estimate of 2.6% in the fourth quarter.  GDP registered  3.4%growth  in the third quarter.  The stock market selloff in that quarter and the first few days of the government shutdown did not have a significant impact on growth in that quarter.  However, we expect a bigger impact from the stock market selloff and government shutdown in Q1 where we anticipate GDP growth of 1.9%.  But with the stock market having recovered most of its fourth quarter drop and the government shutdown now over, we expect a growth rebound in the second quarter to 2.9%.  For the year as a whole we anticipate 2.7% GDP growth after having risen 3.0% in 2018.

Consumer spending rose 2.8% in the fourth quarter despite the stock market selloff.   After a moderate drop in consumer confidence during the stock debacle, confidence has rebounded sharply.  Stock prices have rebounded and are now within 1.0% of their previous high level..  The gains in employment are generating income which gives consumers the ability to spend.  Consumer debt is very low in relation to income.  Interest rates  should be steady through the end of this year.  For 2019 we anticipate growth in consumer spending of 2.5%.

Investment spending rebounded and climbed 5.4% in the fourth quarter after having taken a bit of a breather with a 2.5% growth rate in the third quarter..  Investment spending was essentially unchanged for 2014-2016.  It appears that the corporate tax cuts, repatriation of earnings at a favorable tax rate, and a reduction in the regulatory burden are giving business leaders confidence to open their wallets and spend on new equipment and technology.  Not only will this boost GDP growth in the short term, if investment continues to climb it will boost productivity growth which will, in turn, raise the economic speed limit from about 1.8% previously to 2.8% or so by the end of this decade.

The trade gap widened by $6.0 billion in the fourth quarter to $955.7 billion  after having widened by $108.7 billion in the third quarter.  This means that the trade component had no impact on  GDP growth in the fourth quarter and subtracted 0.2% from the GDP growth rate for last year.  We expect trade to add about 0.2% to GDP growth in 2019.

Non-farm inventories climbed by $96.8 billion in the fourth quarter after having risen $89.8 billion in the third quarter. Going forward we expect inventories to climb by about $70 billion per quarter.

Expect GDP growth of 2.7% in 2019 versus 3.0% last year.

The inflation rate should be fairly steady in 2019.  There is a shortage of available homes and apartments in the housing sector which is raising rents.  That will put upward pressure on the inflation rate.  However, the pickup in inflation will be limited as internet price shopping will keep goods prices steady in 2019.  At the same time, rising productivity growth will offset much of the increase in wages.  As a result, we expect the core CPI to be steady at  2.2% in 2019.

With GDP growth at 2.7% and inflation steady at 2.2%, the Fed will leave rates unchanged at 2.4% through the end of the year.

With no further increase in the funds rate this year and inflation steady at 2.2%, long-term interest rates should rise slightly in 2019 with the 10-year climbing from  2.5% currently to 2.75% by the end of this year.  Mortgage rates should edge upwards from 4.0% currently to 4.5% by the end of 2019.

Stephen Slifer


Charleston, SC


Housing Starts

April 19, 2019

Housing starts declined 0.3% in March to 1,139 thousand after having surged 13.9% in January but contracting 12.0% in February. Because these data are particularly volatile on a month-to-month basis, it is best to look at a 3-month moving average of starts (which is the series shown above).   That 3-month average now stands at 1,193 thousand.

The small March drop was  in both single-family and multi-family construction.   It appears that both categories of starts have leveled off.

While the  housing sector has cooled during the past year,  is that because demand has declined?  Or are constraints on production like a labor shortage and rising costs of materials the more likely cause?  We believe it is primarily the latter.

Both new and existing home sales have rebounded in recent months which is obviously good.

But sales are being constrained by a dramatic lack of supply.  Realtors simply cannot sell what is not available for sale.

The average home stays on the market for 44 days currently which is down from 100 days a few years ago.  About 40% of the homes coming to market sell within one month.  This statistic provides compelling evidence that the demand for housing remains robust.

Monthly  employment gains are about 190 thousand per month which is boosting income.  As a result, real disposable income (what is left after inflation and taxes) is growing at a solid 3.0% pace which is  in line with its long-term average of 2.7%.  That will  provide the fuel for additional spending on housing as the year progresses.

Mortgage rates have recently declined by 0.9% to 4.0% which is the lowest mortgage rate since this time last year.  That should provide some  lift to the housing sector in the months ahead.

Housing remains affordable for the median-price home buyer.  Mortgage rates may have risen, but income has been rising almost as quickly, hence affordability has not dropped much.  At 155.0 the index  indicates that a median-income buyer has 55.0% more income than is necessary to purchase a median-priced house.

The problem in housing is not a lack of demand.  Rather it is a constraint on the production side.  Builders have had difficulty finding an adequate supply of both skilled and unskilled labor.  Construction employment has been growing by about 20 thousand per month but it will be difficult for it to grow any faster.  At the same time tariffs on lumber, steel and aluminum  are driving up the cost of production.

There are plenty of homes that have already been authorized but construction has not yet begun because of builders inability to find workers, and because the cost of materials has risen so sharply in the wake of tariffs on steel, aluminum, and lumber.  Once supply constraints begin to abate we will see starts climb at a somewhat more robust pace as builders begin construction on these previously authorized houses.

Given the continuing strength in demand we expect starts to climb 9.0% this year and reach 1.25 million by the end of 2019.

Building permits fell 1.7% in March.  Because  permits are another volatile  indicator it is best to look at a 3-month average (which is shown below).  That 3-month moving average now stands at 1,292 thousand.   The reason people look at permits is because a builder must first attain a permit before beginning construction.  Thus, it is a leading indicator of what is likely to happen to starts several months down the road.  If permits are at 1,292 thousand, housing starts should be at roughly that same level by yearend.  Thus, our forecast for starts to be 1,250 thousand by yearend may be somewhat too low.  However, keep in mind that builders continue to have difficulty finding enough workers.  The demand for  housing is solid, but can builders get enough workers to push them sharply higher?

Stephen Slifer

Charleston, SC

Retail Sales

April 18, 2019

Retail sales jumped 1.6% in March after having fallen 0.2% in February.  The softness in sales late last year occurred at a time when the stock market declined 20% and there was a protracted government shutdown that began right round Christmas.  But the stock market has already recovered almost all of its fourth quarter loss.  The Fed said it is going to refrain from further rate hikes through the end of this year  And the protracted government shutdown is now over.  Hence, retail was in March clearly rebounded from these two events.  Over the  past year retail sales have risen 3.6%.

Sometimes sales can be distorted by changes in autos and gasoline which tend to be quite volatile.  In this particular instance car sales jumped 3.6% in March.  Gasoline sales rose by 3.5%.  Changes in gas prices  impact the overall change in sales, but they typically do not reflect any significant change in the volume of gasoline sold.

Perhaps the best indicator of the trend in sales is retail sales excluding the volatile motor vehicles and gasoline categories.  Such sales rose 1.8% in January, fell 0.7% in February and climbed 0.9% in March.    In the last year retail sales excluding cars and gasoline have risen a solid 3.7%.

While there has been a lot of disappointment about earnings in the traditional brick and mortar establishments  the reality is that they need to develop a better business model.  The action these days is in non-store sales which have been growing rapidly. Consumers like the ease of purchasing items on line.  While sales at traditional brick and mortar general merchandise stores have risen 1.9% in the past year, on-line sales have risen 11.6%.  As a result, their share of total sales has been rising steadily and now stands at a record 11.9% of all retail sales.

Despite the December and January weakness we believe that retail sales will rebound in the months ahead.  First, the stock market has recovered almost all of its fourth quarter decline.

Second, the economy continues to crank out 190 thousand jobs a month,  Those job gains will produce growth in income.

Third, real disposable income (what is left after paying taxes and adjusting for inflation) has been growing at a solid 3.0% pace.

Fourth, as the Fed tightened steadily for the past couple of years mortgage rates rose to 4.9%, but in the past couple of months as the Fed has pledged to refrain from any further rate increases at least until midyear and as inflation has remained in check, the 30-year mortgage rate has fallen to 4.0%.  That should bolster the housing market as we move into the spring.

Finally, consumers have paid down a ton of debt and debt to income ratios are very low.  That means that consumers have the ability to spend more freely and boost their debt levels if they so choose.

Thus, the pace of consumer spending should rebound in the months ahead.  We continue to expect GDP growth to rise 2.6% in 2019 after having climbed 3.0% last year.

Stephen Slifer


Charleston, SC

Initial Unemployment Claims

April 18, 2019

Initial unemployment claims declined 5 thousand in the week of April 13 to 192 thousand.  This is the lowest weekly level of claims since September 6, 1969.  The four-week average of claims declined 6 thousand to 201 thousand.  This is the lowest 4-week average level of claims since November, 1969 when it was 200 thousand.  The current low level of claims indicates clearly that the trend rate of increase in employment of about 180 thousand remains intact.

As one might expect there is a fairly close inverse relationship between initial unemployment claims and payroll employment.  With initial claims (the red line on the chart below, using the inverted scale on the right) at 201 thousand  we would expect monthly  payroll employment gains to exceed 300 thousand.  However, employers today are having difficulty finding qualified workers.  As a result, job gains are significantly smaller than this long-term relationship suggests and are currently about 180 thousand.

With the economy essentially at full employment, employers will have steadily increasing difficulty getting the number of workers that they need.  As a result, they might choose to offer some of their part time workers full time positions.  But this series is close to where it was going into the recession so they will have limited success in finding necessary workers from this source.

They will also have to think about hiring  some of our youth (ages 16-24 years) .  But the youth unemployment rate today is close to the lowest on record (for a series that goes back to 1970) so there are not many younger workers available for hire.

Finally, employers may also consider some workers who have been unemployed for an extended period of time.  But these workers do not seem to have the skills necessary for today’s work place.  Employers may have to offer some on-the-job training programs for  those whose skills may have gotten a bit rusty.  But even if they do, the reality is that the number of discouraged workers today is quite low — it is essentially where it was going into the recession.

The number of people receiving unemployment benefits fell 63 thousand  in the week ending April 6 to 1,653  thousand.  The 4-week moving average fell 22 thousand to 1,713 thousand.  This series hit a low of 1,654 thousand in late October.

The only way the unemployment rate can decline is if actual GDP growth exceeds potential.  Right now the economy is climbing by about 2.6%; potential growth has probably picked up from 1.8% previously to perhaps 2.3% today given faster growth in productivity.  Thus, going forward  the unemployment rate should continue to decline slowly.

Stephen Slifer


Charleston, SC

Trade Deficit

April 17, 2019

The trade deficit for February narrowed by  narrowed by $1.2 billion to $49.4 billion after having narrowed by $8.8 billion in January.   Exports rose 1.1% in February.  Imports rose 0.2%.  The trade deficit for 2018 was $622 billion which consisted of a goods deficit of $891 billion combined with a services surplus of $269 billion.  The $891 million trade deficit in goods is a record high level.

If we ultimately get renewed deals with Canada, Mexico, the E.U., the U.K., and China (perhaps among others),  those agreements will call for those countries to open their markets, reduce tariffs, and import more goods from the U.S.   Thus, the trade gap may well shrink over time as exports climb.  But late last year through January of this year  countries have been racing to get goods into the U.S. before the new tariffs became applicable.  As a result, imports surged late in the year.  The implementation date for those new tariffs has since been postponed.

We certainly support the notion of free trade.  Through trade American consumers have access to a much wider variety of goods and services at lower prices than they would otherwise.  But there are a couple of important points.  First, free traders (like us) assume that there is also fair trade.  That is the rub.  The Chinese in particular, and others, do not play by the same rules as everybody else.  Second, the yawning trade gap perhaps indicates that current trade agreements like NAFTA, as well trade agreements with Europe and Japan, were not well negotiated and allowed other countries to take advantage of the U.S.    One can make a case that the U.S. has been subsiding growth in other countries at its own expense for years.  Trump has decided that is true and has chosen to impose across-the-board tariffs.

Personally, we think the focus on the magnitude of the trade deficit is misplaced.  A $900 billion trade gap simply means that we bought more from foreigners than they bought from us.  As a result, foreigners accumulated $900 billion of dollars that will be re-invested in the U.S.   Those people might establishes businesses here in the U.S., hire American workers, or invest in our stock and bond markets.  It is not the magnitude of the trade deficit that bothers us.  But, as shown below one-half of that trade gap is with one country — China.  We do not have yawning trade gaps with Canada, Mexico, Europe, Japan, or OPEC.  If Trump is truly concerned about the magnitude of the trade deficit, he should have targeted those countries where it was the largest, namely China.  But he didn’t.  He chose to impose tariffs across the board which impacted our neighbors, friends and allies alike.  Not surprisingly, the imposition of U.S. tariffs generated retaliation by many other countries and it appeared that a trade war was underway.

But as the trade war got started investors around the globe tried to figure out which countries might fare best in a trade war.  Answer:  U.S.  Why?  Because trade is only 10% of the U.S. economy.  It is about 50% of everybody else’s economy.    Everybody loses in a trade war, but the U.S. may lose far less than others.

As other countries began to believe that the U.S. could withstand a trade war better than anybody else,  foreign investors flooded into the U.S. stock and bond markets.  The dollar soared.  That money would be used to create new businesses in the U.S., hire more American workers, and boost our stock market.  Elsewhere, the opposite was occurring.  Currencies were weakening, stock markets were falling, growth was slowing.  The U.S. was winning, the rest of the world was losing.  The question quickly became, how long could these countries withstand the pain?  The answer is apparently, not long.  A new agreement has already been reached with Mexico and Canada.  We are negotiating with Europe.  A deal with China may not be far off.

This has been a painful and perhaps scary process to see in action but, in the end, we may end up with both freer and fairer trade than we had initially.

Frequently exports and imports can be shifted around by price changes rather than the volume of exports and imports.  Thus, what is really important is the trade deficit in real terms because that is what goes into the GDP data.  The “real” trade deficit shrank by $1.8 in February to $81.8 billion after having narrowed by $8.1 billion in January.

Increasing energy production in the U.S. is having a significant impact on our trade deficit in oil.  Since 2007 real oil exports have quintupled from $4.0 billion to $21.0 billion, while real oil imports have fallen from $42.0 billion to $28.0 billion. As a result, the real trade deficit in oil has been cut by about $31.0 billion or 75% in the past several years and is the smallest since the early 1990’s.  In March of last year the U.S. surpassed Saudi Arabia and Russia  and become the world’s biggest producer of oil.  By the end of the decade it should also become a net exporter of oil.  Very impressive!

The non-oil trade gap has widened slightly  in the past year to about $73.0 billion as non-oil exports rose 1.2% while non-oil imports rose by 1.0%.

Stephen Slifer


Charleston, SC

Gasoline Prices

April 17, 2019

Gasoline prices at the retail level rose $0.08 in the week ending April 15 to $2.83 per gallon.  In South Carolina gasoline prices tend to about $0.25 below the national average or about $2.58. The Department of Energy expects national gasoline prices to average $2.60 in 2019, slightly lower than they are currently.

The selloff in the stock market that began in October pushed oil prices lower as investors believed that global GDP growth would slow and, hence, reduce the demand for oil.  Oil prices fell to a low of about $45 per barrel.   But output in Venezuela and Iran has been falling and Saudi Arabia has cut production twice this year.  As a result, oil prices have rebounded to about $64.  The Department of Energy expects crude prices to average $58.80 this year.

The  crude oil output in both Venezuela and Iran has declined markedly.  Venezuela’s oil output has been falling steadily for the past couple of years and is showing no sign of recovering.  In fact, the blackouts in Venezuela significantly curtailed production in March.  The Iran sanctions went into effect in early November.  Iranian production has since fallen sharply.  The U.S.’s  goal is to reduce exports (and, hence, production) close to zero.  The contraction in production in these two countries, combined with voluntary production cuts in Saudi Arabia are the major reasons why oil prices have recently been rising.

Meanwhile, U.S. production  has surged from 10,900 thousand barrels to 12,100 thousand barrels per day.  As noted above, the cut in oil production by the Saudi’s combined with reduced production in Venezuela and Iran has boosted the  price of oil to about $64.  The Saudi’s would like it to climb to $90, or at least $85, per barrel to ensure that their budget deficit remains in balance.  That is not going to happen.  As prices rise U.S. drillers will quickly boost production.  The Saudi’s will not permit the U.S. to steadily increase its market share of the global markets which has already been falling and is  likely to decline farther as the year progresses.

The Department of Energy expects U.S. production to climb 14% from 10.9 million barrels last year to 12.4 million barrels this year and 13.1 million barrels per day in 2020.  The U.S. became the world’s largest oil producer in March of last year and the gap between U.S. production and that of Russia, and Saudi Arabia will widen in 2019 and 2020.

The cut in Saudi production combined with reduced production in Venezuela and Iran  appears to have arrested the recent decline in crude stocks and gotten supply and demand back into better balance..    At 1,104 million barrels crude inventories are  roughly in line with the 5-year average of 1,116 million barrels.

Stephen Slifer


Charleston, SC

Homebuilder Confidence

April 16, 2019

Homebuilder confidence edged upwards by 1 point in April to 63 after having been unchanged in March at 62.   A level of 63 is indicative of a solid level of confidence going forward although, admittedly, it is below readings of 70-75  at this time last  year.

NAHB Chairman Greg Ugalde said that, “Builders report solid demand for new single-family homes but they are also grappling with affordability concerns stemming from a chronic shortage of construction workers and buildable lots.”

NAHB Chief Economist Robert Dietz said  “Ongoing job growth, favorable demographics and a low-interest rate environment will help to modestly spark sales growth in the near term.  However, supply-side headwinds that are putting upward pressure on housing costs will limit more robust growth in the housing market.”

The NAHB report also indicated that affordability still remains a key concern for builders. The skilled worker shortage, lack of buildable lots and stiff zoning restrictions in many major metro markets are among the challenges builders face as they strive to construct homes that can sell at affordable price points.

Traffic through the model homes rose 1 point in April to 47 after having fallen 4 points in March.  However, the combination of falling home prices and lower mortgage rates should boost traffic in the months ahead.

Reflecting optimism about the future the homebuilders expectations index fell 1 point in April to 71 after having jumped 3 points in March.

Not surprisingly there is a fairly close correlation between builder confidence and housing starts.  Given the rebound in the expectations component it is likely that housing starts will pick up further in the months ahead.  But builders continue to have difficulty finding labor so the upswing in starts will probably be muted.

However, builders have many units that have been authorized but not yet started.  In fact, the authorized but not yet started units are the highest they have been in a decade.  Our sense is that as labor slowly becomes available builders will continue building new homes.  Thus, we look for starts to climb about 4% this year.

Stephen Slifer


Charleston, SC

Industrial Production

April 16, 2019

Industrial production fell 0.1% in March after having risen 0.1% in February.   During the past year industrial production has risen 2.8%.  Despite monthly wiggles, production continues to trend upwards slowly.  However, it also appears that its factory production is being curtailed by the trade sector and the impact of tariffs on both firms that import goods from overseas as well as firms that export goods to other countries because of their tit-for-tat increase in tariffs.  Slower growth in exports will not have a major impact on GDP growth in this country, but it is becoming more and more noticeable.

Breaking industrial production down into its three major sub-components,  the Fed indicated that manufacturing production (which represents 75% of the index) was unchanged in March after having fallen 0.3% in February  During the past year  factory output has risen 1.0% (red line, right scale).   Factory activity in January and February hit a speed bump, but given that it occurred in the wake of a 20% selloff in the stock market, a Fed rate hike in that month, and the beginning of a government shutdown, it should perhaps not be too surprising.  But because the stock market has already recovered most of what it lost in the fourth quarter, the Fed has promised to refrain from further rate hikes for the foreseeable future, and the shutdown has finally come to an end, manufacturing activity should rebound in the months ahead.  However, the slower growth attributable to tariffs and the trade sector will be longer-lasting, but moderate.

Mining (14%) output fell 0.8% in March after having been unchanged in February.  Over the past year mining production has risen 10.5%.  Most of the recent upturn in mining has been concentrated in oil and gas drilling activity.  Oil and gas drilling rose 0.3% in March after having fallen 1.3 February.     Over the course of the past year oil and gas well drilling has risen 7.4%.

Utilities output rose 0.2% in March after having jumped 0.7% in February.  During the past year utility output has risen 3.8%.

Production of high tech equipment rose 0.2% in March after having jumped 0.7% in February.  Over the past year high tech has risen 3.5% but obviously its growth rate recently has been slowing down.  It is possible that the slower growth in this category reflects reduced demand for technological products from outside of the U.S. where economic activity has slowed noticeably.   We need to see renewed vigor in this sector if we are going to see the continuing strength in nonresidential investment that will be required for a sustained pickup in productivity.

Capacity utilization in the manufacturing sector fell 0.1% in March to 76.4% after having declined 0.3% in February.  It remains somewhat below the 77.4% level that is generally regarded as effective peak capacity.  However, factory owners will soon have to spend more money on technology and re-furbishing or expanding their assembly lines to boost output.

Stephen Slifer


Charleston, SC

IMF Reduces Global Growth Forecast to 3.3%

April 12, 2019

The IMF recently reduced its 2019 global GDP growth forecast by 0.2% to 3.3% after slicing it 0.2% in October.  Its forecasts receive widespread attention because the IMF has the resources and the skills to examine closely the economies of virtually every country around the globe.   As always, the growth outlook varies depending upon exactly where one chooses to look.

The IMF forecast highlighted the fact that global economic activity is expected be the slowest since the recession.  While that is technically true, the chart below shows that the projected 3.3% growth rate this year is only marginally slower than in any of the previous seven years, so do not be too alarmed.

The IMF expects the U.S. economy to climb 2.3% this year, a growth rate broadly in line with the expectation of many other economists.  For what it is worth, we believe the economy is rebounding sharply from the fourth and first quarter slump caused in large part by the 20% drop in stock prices compounded by the protracted government shutdown.  Business and consumer confidence have largely shrugged off the impact of these two events.  The stock market is closing in on a new record high level.  The labor market is charging ahead with jobs growth of 190 thousand per month which will keep consumer income rising and consumer spending steady at a 2.5% pace.  And the decline in mortgage rates from 5.0% late last year to 4.0% is giving renewed vigor to the housing sector.  As a result of all this, we anticipate U.S. GDP growth of 2.6% in 2019 versus the IMF’s forecast of 2.3%.

Outside of the U.S., the economic environment is disquieting.

The IMF expects growth in China, to slip to 6.3% in 2019.  However, the IMF expects GDP growth in China to drift steadily lower to 5.5% by 2024.  This steady growth erosion largely reflects the negative impact on growth of an aging population.

The IMF’s forecast for Europe for 2019 has been chopped by 0.6% in the past six months to 1.3% which is noticeably slower than average growth of 2.0% in the previous five years.  The IMF cited a variety of reasons for the anticipated slowdown ranging from escalating tariffs imposed by the U.S., concerns about a no-deal Brexit, a worsening fiscal outlook for some countries, and street protests in France which have disrupted retail sales and undermined consumer and business confidence.  Clearly, these are all important factors for determining GDP growth for Europe.  But keep in mind that exports are 13% of the U.S. economy, and trade with Europe is 12% of that.  Thus, the anticipated growth slowdown in Europe will retard U.S. GDP growth this year by perhaps 0.1%.

The IMF has reduced its forecast for Latin America by 0.8% in the past six months to 1.4%.  However, its projected growth rate is roughly in line with growth in the previous five years which means that Latin America’s woes have been ongoing.  The growth reduction this year was led by Mexico which is being hit by a sharp curtailment of growth in exports caused by the combination of increased tariffs imposed by Trump, threatened border closures, and the fate of the new U.S./Mexico/Canada trade agreement.

The rocky political climate in Brazil and the arrest of former President Michel Temer have pulled down consumer confidence in that country to a 6-month low.

And, in Venezuela the political standoff between President Maduro and Juan Guaido has plunged the economy into chaos.  The U.S. imposed sanctions on the Venezuelan economy are taking a toll as the country’s oil exports to the U.S. fell to zero in March.  That has severely constrained the inflow of hard currency needed to pay for imports.  Widespread and recurring power outages are curtailing production in all sectors of the economy.  Meanwhile, residents are trying to cope with a projected 10,000,000% inflation rate.

Finally, in the Middle East and North Africa growth is expected to slow to 1.5% in 2019 as oil production in the region is falling rapidly.

Oil production in Iran, for example, has been hit sharply by the impact of the U.S. imposed sanctions.  Its oil production have fallen from 3.4 million barrels per day in September to 2.6 million currently.  The U.S. wants to eliminate Iranian oil exports.  At the same time Saudi Arabia has voluntarily cut production in an effort to boost oil prices which have rebounded to $65 per barrel.

The point of all this is that the U.S. economic backdrop seems relatively benign and even more friendly if our 2.6% GDP projected growth rate for the year is accurate.  But elsewhere around the globe from Europe, to China, to Latin America, and the Middle East growth will be constrained in 2019.  While there are always economic uncertainties, those potential problems will almost certainly put a lid on global growth this year.  However, the outlook could improve considerably if trade agreements can be reached between the U.S. and China, or between the U.S. and Europe, or immigration policies between the U.S. and Mexico can be stabilized.  Under no set of circumstances should we be thinking about a recession in the U.S. or anywhere else any time for the foreseeable future.

Stephen D. Slifer


Charleston, S.C.