Positive economic growth and low unemployment in the U.S., along with increased consumer and corporate spending, are expected to continue through 2019, according to economic analysts and surveys.
Economic growth is expected to continue into the new year, with an average 3-percent U.S. output and strong gains in domestic job growth, according to Indiana University's (IU) Kelley School of Business.
However, Goldman Sachs & Co. L.L.C. predicts growth will slow significantly in 2019, to roughly 1.75 percent by year-end, from a recent pace of 3.5 percent.
"We expect tighter financial conditions and a fading fiscal stimulus to be the key drivers of the deceleration," Goldman Sachs said.
"Robust job creation should push the unemployment rate to 3 percent by early 2020, well below our 4.5-percent estimate of full employment, the rate consistent with 2-percent inflation. Wage growth should reach 3.25 to 3.5 percent in this environment."
The Congressional Budget Office (CBO) predicted in August that real U.S. gross domestic product (GDP) in 2018 would grow 3.1 percent due to increases in government spending, reduction in taxes and faster growth in private investment. However for 2019, the CBO predicts GDP growth to slow to 2.4 percent amid a slowdown in business investment and government purchases.
The U.S. economy in 2018 exceeded the IU economics panel's predictions a year ago that GDP would grow by 2.6 percent or by about 3 percent if tax reforms were enacted.
"The tax cut has produced an acceleration in the U.S. economy during 2018 to well above the new normal status quo of 2-percent growth," Bill Witte, associate professor emeritus of economics at IU, said.
"We expect output growth in 2019 to average 3 percent, but with deceleration as the year proceeds. By this time next year, quarterly growth will be heading toward equilibrium growth at a little below 2.5 percent."
The IU analysts put a proviso on their forecast, noting the uncertain impact of future political agendas, trade disputes and global economic concerns, especially in China and Europe.
IU analysts said they expect the economy to decelerate mid-year toward a long-run growth rate of about 2.5 percent, due to lower growth in government spending as the budget deal runs its course and a slowdown in employment growth as demographics eventually pull down growth in the labor force.
"The economy heads toward 2019 with considerable momentum from fiscal stimulus and a very strong labor market. Our baseline forecast is that this momentum will carry us through most of next year before slowing to a more sustainable growth rate.
"So for the immediate future we think it will be 'Laissez les bon temps rouler.' (Let the good times roll.) The question is what the hangover will be like," the IU analysts said.
Job market
The current 3.7-percent unemployment rate is at its lowest point since the 1960s, according to The Conference Board, a think tank of senior corporate executives across various industries.
The tight labor market has helped increase average wages and salaries by more than 3 percent during the past year, thus improving consumer confidence and spending.
However, higher labor costs lower business profits, according to the Board, noting that rising wages also put upward pressure on inflation, forcing the Federal Reserve to raise interest rates faster to keep inflation near its 2-percent target.
Federal tax cuts and increased government spending have helped boost growth in 2018 but are also stretching the capital and labor resources of the economy and will provide less support for growth in 2019 as the effects taper off during the year, the Board said.
A year ago, the IU panel expected the U.S. economy would create jobs at a monthly rate of about 175,000 and that the unemployment rate would fall to 4 percent. Instead, monthly job creation through September averaged nearly 200,000, and the jobless rate fell to 3.7 percent.
These job-creation trends are expected to continue into 2019, with average monthly gains of 200,000 jobs, and the participation rate — which measures the percentage of the U.S. population that was employed or looking for a job — remaining flat, according to IU.
Employment growth is predicted to continue at about 200,000 jobs per month through 2019 and with an unemployment rate of 3.5 percent by mid-year.
"The labor market will be increasingly tight," IU's Mr. Witte said. "The unemployment rate could decline a little, but firms unable to find workers will remain an important theme."
An aging population means slower labor force growth, according to The Conference Board, especially among older workers who are retiring in large numbers from jobs not requiring college degrees. Businesses will have to help workers become more productive through well-chosen investments and improved business practice, the Board warned, predicting that between 2019 and 2028, the U.S. economy will average 2.1 percent annual growth, only if businesses find innovative ways of boosting labor productivity.
Goldman Sachs also predicted that the "impressive recent momentum" in job creation is likely to fade gradually. The firm said monthly payroll growth has averaged 215,000 over the last six months and predicts that it is unlikely to slow down until early 2020.
"By then we expect the unemployment rate to have declined to 3 percent, well below our 4.5-percent estimate of the full employment rate consistent with the Fed's 2-percent inflation target," a Goldman Sachs report said.
"Other indicators support this picture of one of the strongest labor markets in memory. The number of job openings per unemployed worker, the quit rate, household reports of the ease of finding a job and employer reports of the difficulty of finding workers all suggest that workers' bargaining power has increased," Goldman Sachs said.
