- Despite recent financial market volatility and growing concerns over trade wars, economic momentum is mounting this year, likely yielding the strongest growth since 2015.
- However, job growth continues to slow as we near full employment and work shortages rise.
- With inflation and wage growth now nearing Fed targets, the Fed will hike its target rate three to four times in 2018, and more next year, slowing economic growth as the cumulative impact of higher interest rates starts to cool business investment and consumer spending.
- Property markets remain vibrant, but signs suggest that conditions peaked three years ago and will continue to trend down, particularly as the economy slows in late 2019 into 2020.
A Long but Moderate Recovery
With our economic recovery — nay expansion — now at 105 months and counting, we’re entering new territory. Assuming the economy keeps growing this month and next, this expansion will become the second-longest in U.S. history, moving past the go-go 1960s. And should the growth continue for another 15 months through next August — not an unreasonable expectation — we’d really be making history with our nation’s longest expansion ever.
Alas, another much less laudable hallmark of this cycle is its moderation. Real GDP has grown less than 20% so far in this cycle and jobs by just 13%. For perspective, in the 1960s expansion, GDP grew 53% and jobs by 33%. Perhaps it was all the dynamic energy from the nascent rock ‘n’ roll movement.
And we expect 2018 will conform to another unfortunate feature of this cycle: the tendency for first quarter GDP to be the weakest of the year (as happened in five of the last eight years). In fact, GDP growth has averaged just 1.2% in the first quarter of each year in this cycle compared to 2.5% during the rest of the year. “Seasonality adjustments” to the raw data are supposed to adjust for the fact that economic activity does indeed slow after the December holidays. So either these seasonality adjustments are missing the mark or the economy really is slowing up more than usual in this cycle for reasons unknown.
Regardless, Q1 2018 growth looks to be the weakest of any quarter since last year at this time and expected to be the weakest of 2018 overall. GDP in the first quarter is predicted to grow by 1.9% according to the Federal Reserve Bank of Atlanta’s, GDPNow forecasting model, and by 2.1% says the economists polled by the Wall Street Journal (WSJ). This is well shy of the 3.1% average for the last three quarters of 2017.
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Andrew J. Nelson is Chief Economist for Colliers International in the United States. Based in San Francisco, he covers a mix of general economic topics as well as related issues that bear on the performance of property markets.