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WSJ: U.S. Economy Flashes It's All Downhill From Here
What if that was as good as it gets?
The Commerce Department reported Friday that U.S. gross domestic product expanded at a 3.5% annual rate in the third quarter.
Coming off a 4.2% growth rate in the second quarter, it marked one of the best six-month stretches for the U.S. economy in the past decade.
However, private analysts and the Federal Reserve say a slowdown is looming. Economists surveyed by The Wall Street Journal estimate the growth rate will slow to 2.5% by the first quarter of next year and 2.3% by the third quarter of 2019. The Fed is expecting growth to slow further to a 1.8% rate by 2021.
“We think U.S. growth may have just peaked,” said Michael Gapen, chief U.S. economist for Barclays Capital, who is in Wall Street’s big-slowdown camp.
Few believe a recession is near, and the expansion is widely expected to become the longest on record next year. Still, a slowdown in growth would have big implications for stocks, the central bank and President Trump. The White House says faster growth is evidence that tax cuts and its deregulatory stance are working, and that the growth acceleration they produced are sustainable.
Mr. Gapen said two big drivers of growth this year—consumers and government spending—will slow in the months ahead. Consumer spending has picked up, thanks to tax cuts. He says the spending impetus from income-tax cuts tends to be greatest in the first two quarters after they’re enacted, and then fades over about eight quarters. Thus consumer-spending growth, which hit a robust 4% annual rate in the third quarter, should slow in the months ahead, though he said strong household saving and low unemployment will prevent a sharp drop-off.
In February, the White House and Congress agreed to increase federal government spending by $300 billion above earlier spending caps. That will propel government spending for several more months, boosting growth, but the budget agreement runs out next September. That means its impact, too, will fade, unless the next Congress agrees to more.
Mr. Gapen noted that the big wild card for growth is business investment. Business tax cuts are meant to increase investment in software, plants and equipment, boosting the economy’s growth rate now and its potential to grow far into the future.
The White House projection of sustained 3% growth hinges on a business-investment boom. It looked like that was happening early in the year. Business investment grew at an 11.5% rate in the first quarter, with gains across many categories, including machines, intellectual property and big structures. But it has faded since, registering just 0.8% growth in the third quarter. That includes a drop in investment in structures such as oil-and-gas rigs, which had been a big driver of growth.
“That’s a worry, particularly after (businesses) got a nice big check from Uncle Sam,” said Beth Ann Bovino, an economist at S&P Global Ratings.
For the White House forecast to play out, business investment would have to rebound. A lower corporate tax rate—down to 21% from 35%—might help. But uncertainty about U.S. trade disputes with China and others might be making business executives wary about proceeding aggressively with new projects.
“The economy is still strong other than some of this noise introduced by the trade tariffs and whatnot,” said Douglas Waggoner, chief executive of freight broker Echo Global Logistics Inc., during an earnings call Wednesday. “We don’t really have a read whether this is just a temporary glitch or a start of a trend.”
The investment picture matters immensely for the Fed as well. If businesses plow money into new software and machines, it increases the chances worker productivity will rise, allowing the economy to grow faster without causing inflation. Stronger productivity would take pressure off the central bank to keep raising interest rates. Without follow-through on business investment, the U.S. could face a different outcome: less growth and more inflation that requires the Fed to keep pushing rates higher.
Interest rate-sensitive sectors already show signs of wobbling. Home building has contracted in five of the past six quarters. Moreover, a stronger dollar, which raises the cost of exports to foreign buyers, could weigh on U.S. trade.
Why has the stock market stumbled of late? Mr. Gapen said investors appear to be sniffing out the slowdown that economists have been calling for several months. While earnings growth was strong in the third quarter, and many analysts still expect double-digit earnings growth through next year, some executives sound wary.
Garbage-hauling and recycling company Waste Management Inc. said Thursday that net income was up 29% from a year earlier in the third quarter, but Devina Rankin, chief financial officer, said “the economy is probably at a peak.”
“There’s definitely some room to go from here,” she said. “But we talked about the length of growth in this economy and the expectation that it could turn from here.”
Appeared in the October 29, 2018, print edition as 'U.S. Economy Flashes Caution Signs.'
https://www.wsj.com/articles/u-s-economy-flashes-signs-its-downhill-from-here-1540656002
https://www.wsj.com/articles/u-s-economy-flashes-signs-its-downhill-from-here-1540656002
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