On January 8, the World Bank garnered many headlines and interviews for its new economic outlook, whose title is “Storm Clouds Are Brewing for the Global Economy.” You should expect to see some equally downbeat commentary when the International Monetary Fund (IMF) issues its World Economic Outlook on January 21. That one is timed to coincide with the World Economic Forum (WEF) in Davos, Switzerland.
Of course, there are a myriad of factors to worry about in contemplating the economic outlook in 2019. The German economy, the fourth largest in the world after the US, China and Japan, post-ed a small drop in the third quarter of 2018 and many analysts expect another one when fourth-quarter data are reported in February. While two consecutive quarters of declines in real GDP are neither necessary nor sufficient to confirm a recession, they are certainly not good news. The UK economy will literally fall off a cliff on March 29 with a “hard” Brexit unless a political miracle occurs between now and then, both within the UK itself and between it and the rest of the European Union. The UK is the world’s sixth-largest economy, so its collapse will hurt world growth. Everyone knows that China and Japan are slowing. You hear some very misguided analysts claim that real GDP is shrinking in China, but that is most unlikely. Official data continue to show growth of 6.5 percent on a year-over-year basis and it is very hard to imagine that could be overstated by very much. Despite all that trauma and other problems such as excessive government debt levels, a slowing in world trade volumes and worries about growth in business fixed investment, the global economy is still expected by the World Bank to post an increase of 2.9 percent in 2019, a very tiny drop from the 3.0 percent anticipated for 2018 when all the data have been compiled.
For the US economy, June 16 will be a milestone. That day will mark the start of the eleventh year of the current expansion. The National Bureau of Economic Research (NBER) has published data on US business cycles beginning with a trough in December 1854. (A trough marks the end of a recession and the start of a recovery.) Currently, the longest expansion is the 120-month one (exactly 10 years) that ran from March 1991 to March 2001. Although the current expansion has had three quarters of declines in real GDP—in the first and third quarters of 2011 and the first quarter of 2014—it has managed to avoid a recession. In The Wall Street Journal forecasting survey that was reported on January 10, not one of the 73 economists surveyed from January 4 through January 8 was predicting a recession for the US in 2019. Granted, all but two of us in the survey expected slower growth over the course of 2019 as compared to 2018. That was generally because 2019 is widely expected to simply be less spectacular than 2018, which was the best year since 2005, economically-speaking. Whether US economic growth in 2019 is faster or slower than in 2018 really boils down to two factors. The biggest is the pace of consumer spending, which accounts for about 70 percent of real GDP.
Consumer confidence, as measured by the Conference Board, the University of Michigan and other organizations, has either been at record highs or at the highest levels since 2000 for most of 2018. Real disposable personal income, which is what you have left after taxes and inflation, has been at record levels for many months. The net worth of consumers and nonprofit organizations, which is reported quarterly by the Board of Governors of the Federal Reserve System, hit a new record of $109.0 trillion as of September 30, 2018. That was about seven times disposable personal income. There have been more job openings than unemployed people for many months now. Not very surprisingly, this has resulted in new records for the total number of people employed even though we are nowhere close to having a record share of the civilian population in the labor force. That important statistic, known as the “labor force participation rate,” has been rising a little in recent months. It was 63.1 percent in December 2018 and the unemployment rate was 3.9 percent. With all this economic strength behind consumers, it is impossible for me to expect any outcome in 2019 except regular new highs for retail sales and total personal consumption expenditures. That alone will give us new economic records in 2019.
The second major factor is business fixed investment. The tax cuts of December 2017 helped boost economic growth and corporate and overall business profits in 2018. Much of the increase in profits, coupled with very strong demand from customers, led to big increases in business fixed investment. If that continues in 2019, we will see new economic records and real GDP growth as strong as or even stronger than we had in 2018. That outcome is most definitely not the consensus view of economic forecasters. However, it is entirely possible. The late John Maynard Keynes, one of the most famous economists of the 20th century, often wrote about the “animal spirits” driving business fixed investment. If these show up this year, it will result in much stronger growth than most forecasters anticipate now.
Keep watching the data. My expectation is that 2019 will be a very good year for the US economy and pretty good for most of the rest of the world. THAT should be a happy new year.