The American economy slowed at the end of 2018 — and there could be a further slowdown to come.
Gross domestic product — the broadest measure of goods and services produced in the United States — grew at a 2.6 per cent annual rate in the final three months of last year, the Commerce Department said Thursday. That marks a significant slowdown from the middle of the year, when a sugar high fuelled by tax cuts briefly pushed growth above 4 per cent.
This year looks to be off to an even worse start. Many economists expect growth to drop below 2 per cent in the first quarter, in part because of the partial government shutdown, which began in December and extended through most of January.
The shutdown also had another effect: It delayed the release of much government data, including the GDP report itself, which came out a month later than usual. That has made it harder for forecasters and policymakers to keep tabs on the economy at what could turn out to be a pivotal moment.
It is important to keep the cooling economy in perspective. The fourth-quarter slowdown was not as severe as many forecasters had feared, and even with the loss of momentum late in the year, 2018 as a whole was the best year of the decadelong recovery from the Great Recession. And most economists do not expect a recession this year, putting current expansion on track to become the longest on record.
“I think this is a slowing,” said Lewis Alexander, chief US economist for Nomura. “I don’t think this is ‘we’re falling into an abyss.’”
Thursday’s report did give President Donald Trump some bragging rights — albeit with an asterisk.
Economic output rose 3.1 per cent in the fourth quarter from a year earlier. That is a politically salient benchmark because Trump and his advisers have repeatedly promised growth of 3 per cent or better, something his predecessor never achieved over a full calendar year.
Still, Trump didn’t quite score a clear victory. By another commonly used method of calculating annual growth — which looks at GDP over full years, not just comparing the fourth quarter of each year — the economy fell just short of that benchmark, coming in at 2.9 per cent. Don’t be surprised if Democrats and Republicans issue duelling news releases, each highlighting the figure that serves them best.
Whether growth hits 3 per cent might matter politically, but it makes little difference economically. The difference between 2.9 per cent and 3 per cent growth is negligible in any one year, and, in any case, the Commerce Department will revise its fourth-quarter estimate in March.
And even if Trump hit his target in 2018, he is unlikely to repeat the feat this year, when the economy will no longer be amped up by tax cuts and government spending increases. The Federal Reserve expects growth to slow to 2.3 per cent in 2019 and many economists are even more pessimistic.
Clouds have been gathering over the economy for a while. The housing market slowed sharply in 2018, as higher interest rates and declining affordability weighed on construction and sales. Business investment weakened as the year progressed. And retail sales dropped unexpectedly in December, a sign that consumers — long the bedrock of the recovery — are starting to pull back.
Economists point to several factors to explain the slowdown. Rising interest rates made it more expensive to buy homes, cars and other big-ticket items. The tax cuts that Trump signed in late 2017 helped pump up spending in early 2018, but those effects have begun to fade. Trade disputes resulted in higher costs and greater uncertainty for many manufacturers, making them reluctant to invest.
“A big factor was the uncertainty around trade,” said Joseph Song, an economist at Bank of America Merrill Lynch. “That took a lot of steam out of the optimism around tax cuts.”
The government shutdown added to the trouble. The funding lapse idled hundreds of thousands of federal workers, left hundreds of thousands more working without pay and disrupted air travel, among other effects. Consumer confidence plummeted.
The shutdown came too late to make much difference to the fourth quarter, but it could be a significant drag on growth early in the year. Macroeconomic Advisers, a forecasting firm, estimates that growth has slowed to a 1.2 per cent rate in the current quarter.
Growth that weak would leave the United States with little buffer against an unexpected round of bad news — an escalation in the trade war with China, for example, or another round of fiscal gamesmanship around the debt ceiling. A rising share of economists expect a recession in 2020 if not sooner.
“The economy’s already slowing and there are a bunch of reasons why it could slow down even more, and that just makes you vulnerable,” said Alexander of Nomura. “It would take less of a shock to push you over the edge” into a recession.
It might not even take a shock at all. If businesses and consumers get nervous about the economy, that could set in motion a vicious cycle of reduced spending and job cuts, said Lindsey Piegza, chief economist for Stifel Fixed Income.
“The recession is almost going to sneak up on us,” she said. “This time around, it’s not a bubble bursting. It’s the air slowly being let out of the balloon.”
Not everyone is so pessimistic. Most economists believe the shutdown did little long-term damage to the economy. Consumer confidence rebounded in February as federal workers returned to work and the stock market bounced back from its December slump. Job growth never suffered.
There are other reasons to think the economy could prove resilient. Trade tensions with China seem to have eased somewhat in recent weeks. The Federal Reserve has backed off plans to raise interest rates. And the combination of low unemployment, rising wages and low oil prices should help drive consumer spending.
“All the fundamentals are there for a solid consumer recovery,” said Michael Pearce of Capital Economics.