Solid Growth to Start 2019, but Still Expect the Economy to Slow
- U.S. economic and job growth both exceeded expectations in the first quarter of 2019, rebounding from much weaker growth to end 2018.
- Nonetheless, GDP growth overall is decelerating in the face of fading fiscal stimulus, slowing global growth and mounting trade tensions, while downside risks are rising.
- However, the Fed’s new “patient” stance reduces the likelihood of further rate hikes this year, raising the odds for a “soft landing” that avoids an actual downturn.
- In fact, the Fed increasingly looks to be done with rate hikes for this cycle, and the next move might well be to cut rates — though not just yet.
- Escalating trade tensions still present the greatest downside risk to U.S. economic prosperity, potentially compounding slowing global growth, and threatening U.S. exports, manufacturing and business investment.
- Heightened political tensions in Washington are another downside risk if the administration and Congress do not work together on critical spending and funding bills.
- On the other hand, escalating wage gains are a clear positive for consumers and the economy overall, though could refuel inflation and force the Fed to once again hike rates.
- Property market fundamentals have been generally flat year to date but remain at cycle highs. Expect further gains to soften in most sectors as the economy cools.
A Strong Start to the Year
So far, so good! But likely not for much longer. The economy outperformed expectations to start the year. Both GDP growth and job gains have surprised to the upside, which benefited the property sector. Nonetheless, the trends were not quite as positive as the headlines suggest, and do not alter our basic view that the economy has again started to cool.
On the positive side, nonfarm payrolls grew by a robust 224,000 in April (revised), its strongest performance since December, driving unemployment to just 3.6%, its lowest rate in five decades. Still, monthly job figures are notoriously volatile, so we should not read too much into a single month of data. Indeed, the May figure fell back to just 75,000. Average job gains in 2019 have been much less positive than last year, at just 164,000 per month, compared to 223,000 per month in 2018. Moreover, with unemployment so low, the number of job openings continues to exceed the number of unemployed workers, creating labor shortages and driving up wages. All of these factors suggest a hiring slowdown is in the works.
The growth in GDP was perhaps even more surprising at 3.1% annualized in the first quarter, modestly topping consensus forecasts. This figure is deceptive however, as beneath the surface, trends were not nearly so positive. Most worrying, consumer spending — which accounts for some 70% of GDP — grew by only 1.3% in the quarter, despite the strong gains in jobs and wages. Stripping out volatile factors like inventory adjustments and trade, the core domestic economy (“final sales to domestic purchasers”) rose by a much more modest 1.5%, its weakest reading since the end of 2015.
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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.