Seen through one lens, the US was the economic success story of 2018. But a slowdown could be on the wayby Vicky Pryce / January 9, 2019 / Leave a comment
As the elite prepares for the annual pilgrimage to Davos for the World Economic Forum, what should we make of what is happening in the US? On the surface this was the one success story of 2018. Growth of some 3 per cent—now the fastest in the G7, mostly as a result of President Trump’s fiscal stimulus in the form of tax cuts for the better off.
What else? Unemployment fell to 3.7 per cent in the early autumn of last year, a 49-year low, well below the level of 4.5 per cent which many in the market, including Goldman Sachs, perceive as the sustainable “full employment rate” for the economy. Although it unexpectedly rose to end 2018 at 3.9 per cent, the number of jobs created in December was a staggering 312,000. In the process inflation has moved only marginally—staying pretty close to the target 2 per cent. What’s more, the US become effectively self-sufficient in energy last year and a net oil exporter, thanks to plentiful shale oil production.
And yet despite all the good news, there seems to be a mix of political and economic uncertainty that is spooking the markets. The Dow Jones industrial index of blue chip companies had its worst year for ten years, losing some 5.6 per cent of its value. The losses were significant also for the S&P 500 which fell by 6.2 per cent, and the information technology companies heavy Nasdaq Composite index whichalso fell by 3.9 per cent.
Some days saw extreme stock market volatility, which got much worse as the year went on. There were several economic factors at play—concern about a slowdown in China; downgrading by the IMF of global growth to 3.7 per cent for 2019; and rising US interest rates which Trump has very vocally objected to. Among large firms Facebook became unstuck on its questionable use of personal data, which unsettled belief in tech stocks. Apple shares were severely punished once the markets realised that squeezed consumers were becoming reluctant to change their iPhones for a newer, more expensive model as often as had been forecast.
And the list gets longer. There is of course a trade war underway, leading to the extension of tariffs on some half of Chinese imports into the US—reciprocated by the Chinese; and the threat to extend tariffs to all Chinese imports after the current 90-day truce is over. At least more discussions are taking place right now in Beijing, offering the markets some much needed encouragement.
Then there is the extra political uncertainty. With the Democrats taking control of the House in the mid-term elections all bets are off. Already the US has been plunged into crisis as it tries to cope with a partial shutdown of government, following the Democrats’ refusal to grant Trump the $5bn he says he needs to build the wall.
So what can we expect? That a slowdown is coming is clear. This will probably surface half way through the year as the fiscal stimulus diminishes. The markets may get some reprieve if a deal is struck in Beijing this week or later this month, if indeed a meeting is planned between Trump and Xi Jinping on the sidelines of Davos, as rumoured. And Jerome Powell, the new Federal Reserve chair, appears less inclined to raise rates this year than had been thought as he talks about taking a more “patient” approach to monetary tightening.
The consumer is still reasonably optimistic given the good employment trends, unfazed so far by the stock price falls. But the latest readings suggest that businesses are becoming a bit more pessimistic, particularly smaller firms.
On the other hand, though confident in general about the US economic environment, business optimism about global trade and growth prospects has fallen. Still, the outlook remains a generally positive one barring some disastrous trade outcome. Rather than the recession that many observers feared, most forecasters now anticipate US growth to ease from the second half of 2019 onwards but to still hit around 2 to 2.5 per cent for the year as a whole—again above the rest of the G7.
The main risk though remains political uncertainty which will still be weighing on US markets through 2019—and inevitably also on global markets more widely. Perhaps then all that Trump will have succeeded in doing is to have pushed the year of reckoning over to 2020? We’ll have to wait and see.