“O woe! O woeful, woeful, woeful day….Never was seen so black a day as this…” past Wednesday, when the Organisation for Economic Co-operation and Development (OECD) reduced its forecast for US economic growth this year from 2.7% to – wait for it – 2.6%, which is the rate at which the economy grew in the final quarter of 2018. In fact, the OECD is among the optimists. Both the World Bank and the International Monetary Fund expect 2019 growth in the US to clock in at 2.5%, the Economist’s guess is 2.3%, and both Goldman Sachs and JP Morgan see 2019 as a 2.0% year, or less. All of these are downward revisions of earlier forecasts – the shelf life of economic forecasts is only a few months these days. Best to be charitable. We should allow economic forecasters, whose job is a miserable one, to call changes in their projections “revisions” rather than “corrections”.
The view from the Trump White House is considerably cheerier. Larry Kudlow, the President’s chief economist, expects America, “the fastest growing economy in the world”, to chalk up “3%-plus growth” this year. My guess is that this is not Kudlow toeing the White House line, but real conviction.
The safest assumption seems to be that 2019 will be a good year, probably not as good for corporate profits as 2018, but very good for workers, whose share of the national pie has been declining in recent years. The Federal Reserve Banks’ survey of current business conditions puts it this way, “Economic activity continued to expand in late January and February”, with ten of the twelve Fed districts reporting “slight-to-moderate growth” and the other two, flat conditions.
The service sector, which constitutes about 80% of the economy, can only be described as booming. All eighteen industries covered by the Institute for Supply Management (ISM) reported growth last month. The index, already well past the 50%-mark that indicates growth, rose, driven by a 13-year high in new orders. The ISM manufacturing index fell in February, but remained above the 50% mark.
The sectors creating most concern going forward are autos and housing. A fall in vehicle sales to consumers in 2018 was made up by less profitable fleet sales (car rental companies and government agencies), and delinquencies on car loans are troubling. But sales did top 71 million vehicles, with highly profitable sales of SUVs and light trucks leading the parade. And auto companies are planning to introduce 45 new or redesigned models this year to pump sales.
The housing market has been weak, but at year-end seemed to be recovering. Sales of newly built homes in 2018 topped 2017 by 1.5%, despite higher mortgage rates during the year. But by historic standards the market for existing as well as new homes remains less than robust, in part because of a shortage of homes available for sale, in part because millennials prefer renting in urban areas next to a chic restaurant rather than buying a home-plus-back-yard for the dog.
One thing seems certain. The jobs market is strong, and unemployment is likely to remain low. Most analysts agree that the puzzlingly weak jobs report for February, a mere 20,000 new jobs, less than one-tenth of the number in recent months, is some sort of aberration. “A silly fluky number” according to Kudlow. It may be that severe weather during the survey week, and the government shutdown dampened activity. The reported low job creation is inconsistent with a continued low (3.8%) and falling unemployment rate and the 3.4% year-over-year increase in average hourly earnings, the biggest gain since 2009.
My inclination is to believe what my eyes and ears are telling me. Every conversation I have with businessmen around the country begins with a complaint about a shortage of workers, skilled and unskilled. Workers earning $8.50 an hour as carers in Virginia are being hired away by a neighboring shipyard to train as welders at hourly pay of $20 — $25 on completion of training. Property developers in Colorado and Arizona tell me they can’t meet the demand for housing because they can’t find roofers and electricians, and that competition is driving wages up by enough to make it impossible to keep the price of new homes within the budgets of first-time home buyers.
We have now had 101 consecutive months of job growth, and workers are so scarce that Eric Morath and Lauren Weber report in The Wall Street Journal, “The job market doesn’t get much better than this … low-skill jobs are being handed out to pretty much anyone willing to take them …. All sorts of people who have previously had trouble landing a job are now finding work. … racial minorities and those with less education. … Americans with disabilities and those with criminal records.”
I worry less about autos and housing and the latest jobs report than about the headwinds blowing from foreign lands. In Asia, Japan is headed for less-than 1% growth. China’s economy is slowing, exposing president Xi Jinping to open criticism of his retreat from the market-based economic reforms initiated by his predecessors.
Euroland is in “a period of continued weakness and pervasive uncertainty” announced European Central Bank president Mario Draghi, as he lowered the Bank’s 2019 growth forecast from 1.7% to 1.1% and promised not to raise interest rates this year.
- Italy is in recession,
- Germany is teetering on the brink of one,
- France’s youth unemployment rate is over 20%,
- Spain is in the midst of a political crisis, and
- the OECD has decided that Britain will eke out only 0.8% growth this year, a bit ahead of Germany’s 0.7%, if that’s any comfort to British subjects already confronting the uncertainties created by their Prime Minister’s botched Brexit negotiations.
It remains to be seen whether “America First” policies will shield the country from these foreign woes.