Following growth of 3.1% in Q1 of this year, U.S. real GDP expanded at an estimated annual rate of only 2% in Q2. The slowdown can be attributed primarily to the effects of the escalating tariff war with China. Another factor at work: strong growth in household and service sector spending was partially offset by a weakness in manufacturing and business investment spending. Although the current U.S. economic expansion is the longest in American history (beginning in 2009), it still is subject to a basic principle of business cycle theory: Expansion cycles do not die of old age but rather because of spreading excesses and imbalances within the economy that undermine the economy’s natural tendency toward growth.
In this edition of Economic Commentary, Robert F. DeLucia, CFA and Consulting Economist for MEMBERS Capital Advisors, Inc., provides a comprehensive economic review of 2019 at the halfway point as well as an outlook for the rest of the year. Here are the highlights:
- Hypothetically, in the absence of the current tariff war, U.S. economic growth during 2019 would be closer to 2.75%, rather than the current pace of 2%. World GDP would be significantly stronger at 3.5% versus its current 2.5% growth rate.
- Business investment spending has been a major casualty of the trade conflict and would likely be much stronger in a non-tariff environment. Businesses have postponed long-term investment projects because of the enormous uncertainty surrounding tariff policy.
- Sustainability of the current U.S. economic expansion cycle is dependent upon U.S. trade policy and the speed at which typical late-cycle supply pressures gather momentum.
- I have recently adjusted my forecast for U.S. economic growth over the next two years to allow for the growing uncertainty associated with trade policy. The U.S. and world economies will weaken progressively the longer the tariffs remain in effect.
- Because of these trade tensions, my forecast now assumes slower GDP growth over the next several quarters. The odds of a recession during the next year are well below 50% but would rise commensurately with an escalation in tariffs.
- I also expect that the business expansion cycle will be sustained for a longer period, assuming China and the U.S. agree to a satisfactory resolution of trade tensions prior to year-end. The implications would be extended business and earnings cycles and postponement of the next recession until 2022 or later.
- U.S. real GDP appears on track for growth of 2% during the second half of this year. An interim resolution of the trade conflict between China and the U.S. would lay the foundation for 3% economic growth during the first half of next year and 2.75% GDP growth for all of 2020.
- Diminishing inflationary pressures should also support a lengthening of the business expansion cycle. Core consumer inflation has declined from 2% one year ago to only 1.6%, and is likely to stabilize at its current pace through year-end, at a minimum.
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All opinions and commentaries expressed are those of the writer, Robert F. DeLucia, and do not necessarily reflect the opinions of CUNA Mutual Group, CBSI, or its management.
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