US Economic Outlook: Q3 2018

The US economy is expected to see mediocre long-term growth, even though the short-term outlook might appear optimistic.

We have upgraded US GDP growth forecasts to 2.5-2.9% in 2018 and 2.3%-2.9% in 2019. Fiscal stimulus is the key contributor to the faster growth over 2018-2019, adding 0.5-0.7% growth annually. The comes from a combination of tax cuts and increased in federal government spending in recent congressional bills.

The 15th September will mark 15 years since the collapse of the investment bank Lehman Brothers, widely accepted as signifying the start of the global financial crisis. The bankruptcy of the Lehman Brothers bank led to a run on money market funds and a financial market shock that required massive Federal Reserve interventions and government bailouts to prevent a total collapse of the financial system. While economic forecasts from 2018-2019 might show that the US economy is undergoing a temporary boom, household income and consumption are still depressed relative to pre-crisis levels.


Indicator
2017

%

2018(f)

%

2019(f)

%

2020(f)

%

2021-2025 average(f)

%


2018 forecast change

Percentage points


2019 forecast change 

Percentage points

Real GDP Growth 2.3 2.7 2.6 2.1 1.6 0.2 0.2
Inflation 2.1 2.6 2.4 2.1 2.0 0.2 0.1
Federal Funds Rate 1.0 1.9 2.8 3.3 3.0 0.1 0.3

 

Strong consumption growth but still below trend

Consumption increased 2.5% year-on-year during the first half of 2018. Consumer credit conditions continue to be favourable and household net worth to income ratios are close to record highs, with real disposable income increasing 2.8% year-on-year. Consumer confidence has declined relative to the first quarter of 2018, but it remains at a similar level to the early 2000’s boom, supporting robust consumer spending growth. We expect consumption to increase by 2.1%-2.5% in 2018 and by 2-2.6% in 2019.

Per capita consumption and income are still 10% lower than they would have been under the trend growth over the last 50 years, after increasing at an annual rate of just 1.4% over 2001-2018. This reflects a large decline during the 2008 financial crisis, followed by a very weak recovery.

Investment spending still below pre-crisis level

Business investment has increased by 7.1% year-on-year in the first half of 2018, due to a combination of lower business taxes and an ongoing rebound in the oil and gas sector.

We expect business investment to increase by 5.4-5.7% in 2018 and 3.2%-3.6% in 2019, supported by lower business taxes, higher profits and a stronger business confidence. Business financing condition also remain favourable despite a rise in corporate bond yields.

Investment spending (relative to GDP) is still below the pre-crisis level, though this is mostly due to less housing investment. There is a still a large gap in business capital relative to previous trends, dragging down labour productivity.

Low productivity growth due to pre- and post-financial crisis problems

Annual labour productivity growth has slowed to just 0.7% since 2009 and is projected at 0.8-1.6% annually in 2018-2027.

Part of the productivity slowdown reflects persistent effects of the global financial crisis. Lower investment rates have resulted in loss production capital, less research and development and lower gains from capital-biased technical progress. The financial crisis also contributed to a decline in new business entry rates and greater misallocation of capital and workers across firms.

In reality, labour productivity had started slowing down in 2005, except for the 2009 recession when large employment losses led to a temporary productivity strike, this suggests that other pre-crisis factors have also reduced productivity growth.

Stagnating incomes, higher inequality and lower consumption growth

Median household income has barely increased since 2001, only recently recovering to pre-crisis levels, due to a mix of low average wage growth and rising inequality.

Recent research emphasises how fast growth in house prices before 2008 allowed middle class wealth to almost keep up with that of the top 10% of the wealth distribution, despite stagnating real incomes.

After 2008, house prices crashed and recovered slowly, with average house prices based on the Case-Shiller index just 23% above their level 10 years earlier in August 2018 (compared to a 15% increase in consumer prices). Meanwhile, stock markets quickly reversed their initial crash and entered the longest equity boom in US history, with the US S&P500 rising by 117% over 10 years.

Lower and middle-class household assets are overwhelmingly concentrated in housing and are offset by high household debt levels. This divergence between housing and stock market prices significantly increased wealth inequality.

To learn more, download the strategy briefing Global Economic Forecasts: Q3 2018, offering further insights on the global economy and the latest global macroeconomic projections.