By pretty much any metric, the economy had a pretty amazing 2018. The stock market remains close to record highs, consumers are spending more, and unemployment is low.
The gross domestic product (GPP) in the United States rose at an annual rate of 3.5% in the third quarter of this year, following a 4.2% growth pace in the second quarter, according to the Bureau of Economic Analysis.
As we close out the year, though, many economists are expressing a “what goes up, must come down” forecast for the next year. While few are advocating that we are headed directly for recession, there is evidence that economic growth just won’t hit the same heights it did this year.
Of course, there are others, including President Donald Trump, who are dismissing the cloudy predictions as nonsense.
The upcoming slowdown
The nonpartisan Congressional Budget Office, which analyzes data for Congress, reported in August that it believed GDP growth will drop to 2.4% next year “as growth in business investment and government purchases slows,” the report notes.
Although it still forecasts GDP growth, the CBO thinks the rate in 2019 will be significantly below the 3.1% annual GDP increase it predicts for 2018.
The CBO explained that it believes production in the U.S. will overwhelm demand.
“Growth of actual output is expected to outpace the growth of its maximum sustainable amount through the rest of 2018 and 2019, creating excess demand in the economy,” the report continues. “Although that growth in actual output leads to lower unemployment rates and higher income in CBO’s forecast, it also creates demand for goods, services, and labor that exceeds the economy’s long-run capacity to supply them.”
That demand is good news for many, because it will push wages higher. However, it will also likely result in increased prices and interest rates.
Looking even further forward, the CBO believes the excess demand in the economy will be dampened by 2022. Between 2023 and 2028, annual GDP growth will drop to about 1.7%.
A report from Goldman Sachs released in November echoed the CBO. The bank predicted GDP will drop to 1.6% to 1.8% for the final two quarters of 2019.
Goldman Sach’s chief economist Jan Hatzius told clients that the slowdown will be cause by “tighter financial conditions” and depreciating returns from the 2017 bill overhauling the tax code, calling these two factors the “key drivers of the deceleration.”
Former Treasury Secretary Larry Summers made headlines this month when he said a slowdown in GDP growth was a “near certainty.”
Summers, who served in the administration of former President Bill Clinton, told CNBC of even more dire predictions. While most economists are not predicting a recession, Summers said that “the recession risk is nearly 50% over the next two years, maybe slightly less.”
Sunny outlook from the White House
For its part, the White House has strongly countered the arguments that the economy will have a sluggish 2019.
Upon reading about the Goldman Sachs predictions, Larry Kudlow, the top White House economic advisor, dismissed the predictions.
“The basic economy has reawakened and it’s going stay there,” Kudlow said told White House reporters. “I mean, I’m reading some of the weirdest stuff, how a recession is around the corner — nonsense.”
Kudlow also hit back at Summers’ recession forecast.
“My personal view, our administration’s view, recession is so far in the distance I can’t see it,” Kudlow continued.
If the economy continued to grow to end of 2020, it would be a historically great economy.
Currently, Trump is feuding with the Federal Reserve, the nation’s top bank, over how to continue the economic victory of 2018. Trump wants the Fed to reduce interest rates in the hopes that it will juice up consumer and business spending.
The Fed, though, hiked interest rates four times this year. Morgan Stanley economist Ellen Zentner believes the Fed will increase rates another two times within the first six months of 2019.
The Fed argues that it continues to raise rates so that the economy does not become overstimulate. The rate hikes are also meant to prevent bubbles, like the housing bubble of the mid-2000s, to form.
Another major question about the 2019 economy is how Trump’s tariffs will play out. He argues that the taxes on imported goods encourages job repatriation to the U.S. and better prices for American consumers.
Many politicians and industry have pushed back strongly against this line of reasoning, but Trump seems assured the tariffs will be a boon for consumers and the wider economy.
“Billions of Dollars are pouring into the coffers of the U.S.A. because of the Tariffs being charged to China, and there is a long way to go,” Trump tweeted recently. “If companies don’t want to pay Tariffs, build in the U.S.A. Otherwise, lets just make our Country richer than ever before!”