Overall, the economy continues to perform well. However, trade policy and interest rate hikes are a source of great doubt. Such unknowns may be holding back some business investment and may also impact consumer confidence and spending.
The real risk is apparent when we accelerate the model to show a 25% tariff on all Chinese imports. We assume the Chinese will impose a similar tariff on all US exports in addition to devaluing the yuan. This will have a direct impact on businesses and consumers, but the indirect effects of this hike on the economy could be even larger. Many Chinese products that are imported into the US are either capital goods or intermediate goods that are used by US companies to produce final goods and services. As a result, a wide-ranging number of businesses will feel the impact of a broader tariff hike.
The second major risk to consider is interest rates. With the Federal Reserve policy of tightening, we expect another increase in the federal funds rate in December. This is reflective of some signs of inflation that may be creeping in. Higher interest rates will dampen economic growth.
If we consider only the near-term prospects, things continue to look favorable. There are many positives to offset some of the risks. For example:
- Overall economic growth
- A strong labor market with increasing wage growth
- Fiscal stimulus, including deficit-financed tax cuts and spending, that continues to push the economy forward
If these indicators continue to perform through the middle of 2019, this will become the longest economic expansion in US history. At the moment, all indicators suggest there is enough momentum to carry us forward. However, we should be mindful of the risks.
We continue to add hundreds of thousands of jobs to the economy every month. The unemployment rate is 3.7%, which is the lowest rate in 50 years. By our projections, we expect the unemployment rate to fall even further getting closer to 3.4% over the next year. As we move into 2020, recession risks will build as some of the fiscal stimulus fades away. Additionally, we expect job growth to slow down along with investment and consumer spending in 2020 as interest rates rise. The unemployment rate may actually start to rise to its long-run, equilibrium level.
Source: Santiesteban, Flor. (2019, January) Q4 Economic and Credit Trends: Risk to the Economy [Web Article]. Retrieved from https://insight.equifax.com/3-takeaways-from-q4-economic-and-credit-trends-webinar-2/?intcmp=homepage__most_recent