Tuesday, 16 of July of 2019

Economics. Explained.  

Category » Forecasts

GDP, Inflation, and Interest Rate Forecasts

July 12, 2019

The final estimate of first quarter GDP growth came in at 3.1% which was exactly the same as the revised estimate, and compares to an initial estimate of 3.2%.  The stock market selloff late last year and the government shutdown early this year almost certainly pulled down both consumer spending and investment spending in the first quarter.  Both of these categories should rebound in the second quarter given that the the stock market is at a record high level and the government shutdown now over, but the bloated level of inventories will shrink considerably in Q2.  As a result, we expect GDP growth in the second quarter of 1.5% after having risen 3.1% in the first.  For the year as a whole we anticipate 2.6% GDP growth after having risen 3.0% in 2018.

Consumer spending slipped to 0.9% in the first quarter because of the stock market drop combined with the government shutdown.  However, stock price are now close to a new record high level and the shutdown is over.  Thus, we expect consumer spending to jump 3.3% in the second quarter.  Over the longer term 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 2.3%.

Investment spending slowed in the first quarter to 4.4% after having risen 5.4% in the fourth quarter of last year.  Growth in this category slowed in the first quarter for the same reasons that consumer spending slowed — the stock market drop and the shutdown.  We expect nonresidential investment to jump 6.0% in the second quarter and increase 5.8% for the year.  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 narrowed by $50.7 billion in the first quarter to $905.0 billion.  This means that the trade component added 1.0% to  GDP growth in the first quarter.  We expect trade to add 0.2% to GDP growth in 2019.

Non-farm inventories jumped by $122.8 billion in the first quarter and added 0.5% to GDP growth in that quarter.  Going forward we expect inventories to rise $55.0 billion in the second quarter and climb by about $70 billion per quarter thereafter.

Expect GDP growth of 2.6% 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.  Also, higher prices from China in the wake of the newly-imposed tariffs will boost inflation.  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 increase 2.3% in 2019 versus 2.2% last year..

With GDP growth at 2.6% and core inflation inching upwards to 2.3%, we do not believe that the Fed needs lower interest rates.  However, Fed officials in recent weeks have expressed a fear of substantially slower growth in the quarters ahead, and noted that inflation remains stubbornly below its 2.0% target.  It has also telegraphed a desire for lower rates perhaps starting at the FOMC’s next meeting on July 30-31.

With a 0.25% cut in the funds rate later year and core CPI inflation edging upwards to 2.3%, long-term interest rates should rise slightly in 2019, the 10-year note yield could climb from  2.0% currently to 2.35% by the end of this year.  Mortgage rates should edge upwards from 3.8% currently to 4.0% by the end of 2019.

Stephen Slifer


Charleston, SC