Tuesday, 22 of January of 2019

Economics. Explained.  

GDP, Inflation, and Interest Rate Forecasts

December 21, 2018

GDP growth rose 3.4% in the third quarter.  We expect GDP to rise 3.1% this year and 2.8% in 2019.

Consumer spending rose 3.4% in the third quarter after having risen 3.8% in the second quarter.  We expect it to rise 2.6% in 2019.  The consumer and corporate tax cuts should lift the stock market to yet another record high level by yearend.  Stock prices should rebound which will boost household wealth.  The gains in employment are generating income which gives consumers the ability to spend.  Consumer debt is very low in relation to income.  Consumer confidence is at an 18-year high.  Interest rates  are rising very slowly but remain low.

Investment spending took a breather and slowed to 2.5% in the third quarter after having climbed 8.7% in the second 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% today to 2.8% or so by the end of this decade.

The trade gap widened by $108.7 billion in the third quarter to -$949.7 billion after having narrowed by $61.4 billion in the second quarter.  This means that the trade component subtracted 1.9% from GDP growth in the third quarter after having added 1.4% to GDP growth in the second quarter.  We expect the trade component to subtract 0.2% from  GDP growth in 2019.

Nonfarm inventories surged by $89.8 billion in the third quarter after having declined $36.8 billion in the second quarter. Going forward we expect inventories to climb by about $75 billion per quarter.

Expect GDP growth of 3.1% in 2018 and 2.8% in 2019.

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 edge upwards from  2.2% this year to 2.3% in 2019.

With GDP growth at 2.8% and inflation relatively steady at 2.3%, the Fed may tighten only twice in 2019 which would raise the funds rate to 3.0%.

With a couple of Fed rate  hikes next year and fairly steady inflation, long-term interest rates should rise slightly in 2019 with the 10-year climbing from  2.8% at the end of this year to 3.2% in 2019.  Mortgage rates should climb from 4.7% at the end of this year to 4.9% by the end of 2019.

Stephen Slifer

NumberNomics

Charleston, SC

 


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