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- President Donald Trump has boasted about the upswing in the US economy for much of 2018.
- But according to economists at Goldman Sachs, JPMorgan, and Bank of America Merrill Lynch, the economy is showing signs it could cool down in 2019.
- The combination of a fading tax-cut stimulus, tariffs, and tighter financial conditions will all contribute to a slower pace of economic growth.
President Donald Trump has had a lot to brag about on the economic front in 2018.
But according to a growing consensus of Wall Street economists, the economy is showing fresh signs it could cool off in 2019, as the shot in the arm from Trump’s policies wears off during the course of the year. Economists at Goldman Sachs, Bank of America Merrill Lynch (BAML), and JPMorgan all predicted that 2019 GDP growth will be materially lower than in 2018.
“Growth is likely to slow significantly next year, from a recent pace of 3.5%+ to roughly our 1.75% estimate of potential by end-2019,” Jan Hatzius and David Mericle, Goldman Sachs economists, said in a note to clients.
The reason for the slowdown is twofold:
- The economists expect the stimulus from the GOP tax cut bill and the massive bipartisan budget agreement to start to fade next year.
- “In the US, the double dose of caffeine from tax cuts and spending increases is already starting to wear off,” Ethan Harris and Aditya Bhave of the BAML team wrote.
- At the same time, the US is expected to get hit with growing headwinds from Trump’s continued trade war with China and the Federal Reserve’s interest rate hikes.
These two factors could make the economic sugar high fade even faster than expected.
“Monetary, fiscal and trade policies all are turning somewhat less friendly for growth next year,” Michael Feroli, Jesse Edgerton, and Dan Silver, JPMorgan’s economist trio, said in their outlook.
Fading fiscal stimulus
In the run-up to the passage of the GOP’s Tax Cuts and Jobs Act (TCJA) most Wall Street economists agreed that the tax cuts in the bill would prompt a short-term bump for the US economy. While the size and duration of the bump were hotly debated, all three Wall Street economists expect the boost will start to fade in the second half of 2019.
There are already signs that the boost from the tax cuts are fading and they could become more obvious next year, JPMorgan’s economists said. They cited the slowdown in capital investment from corporations, for instance.
“The tax cuts already have been lifting growth throughout much of 2018, and we think that federal spending associated with the spending bill will firm noticeably around the turn of the calendar year,” the JPMorgan economists said. “But the impact from the tax cuts likely is already starting to fade and the lift from federal spending will also ease over time, so we expect fiscal thrust to moderate toward the end of 2019.”
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A big part of that will come from a relative slowdown in consumer spending, which was supported in 2018 by the tax cut’s boost to most Americans’ take-home pay.
“After-tax income jumped higher in February 2018 but will return back to its normal growth in February 2019,” wrote Michelle Meyer, another one of the BAML economists.
Similarly, the JPMorgan team said it expects that consumer spending will grow by 2.2% in 2019, down from the roughly 2.7% pace in 2017 and 2018, mostly due to “waning fiscal stimulus and tightening financial conditions.”
Elsewhere, the Federal Reserve is also expected to continue interest-rate increases in 2019 (much to Trump’s chagrin). The economists said that would make it harder for businesses to borrow and tighten financial conditions. All told, the hikes will likely help to keep a lid on any upside for GDP growth.
Trade war troubles
Trump could further hinder himself by continuing to fight a drawn-out trade war with China.
- A 10% tariff on $200 billion worth of Chinese goods is scheduled to increase to 25% on January 1.
- Trump also threatened tariffs on the remaining $257 billion worth of Chinese goods that are not currently subject to duties. Those tariffs would fall more heavily on consumer goods, possibly weighing on American households.
The JPMorgan team said price increases for consumers would be more than enough to offset the 2018 boost from the tax cuts.
“The household sector was the beneficiary of a roughly $120 billion reduction in taxes beginning in early 2018,” Feroli, Silver, and Edgerton wrote. “Next year, if 25% tariffs go through on Chinese imports, that would amount to a tax increase of over $100 billion, much of which would fall on the consumer.”
Some analysts, like Seth Carpenter, the senior US economist at UBS, have presented even more dire possibilities.
As Business Insider’s Will Martin reported, Carpenter thinks the trade war could actually drag GDP growth below 2% as early as the fourth quarter of 2018.
“We are outliers compared to the rest of Wall Street in terms of how big an effect the tariffs have on the US economy,” Carpenter said in London. “We expect a material slowing in the fourth quarter of this year – so right now – into the first quarter of next year.”
By contrast, the Goldman, BAML, and JPMorgan teams said the tariffs are likely to shave a few tenths of a percentage point off of 2019 GDP growth – and a deal to eliminate the tariffs could come during the year.
But this doesn’t mean there isn’t danger of an escalation.
“An even more dire argument for major escalation draws on concept of a Thucydides Trap,” BAML’s economists wrote. “This is the view that when one great power threatens to displace another, war is almost always the result. In this case, tariffs could extend to all trade on a sustained basis as the US tries to contain China’s emergence as an economic rival.”