2018 US Economy: Smooth Sailing or Storms Ahead?

GAI Community Solutions Group’s Chief Economist Steven McDonald, CVA shares his insight into the 2018 US economy and considers possible ‘black swan’ factors that may affect the current positive outlook.

During an economic panel discussion this week, I was asked to identify any ‘black swans’ for 2018. What is a black swan, you ask? Yes—it’s a type of water fowl. But for economists, the term represents an unpredictable event that has major and possibly catastrophic effects. Additionally, black swan events by definition become predictable only in hindsight. Of course, this makes it the perfect question for an Economist—someone who (to paraphrase several witty wordsmiths) can tell you tomorrow why what they predicted yesterday didn’t happen today.

Jokes aside, my response was a recession.

The 2018 US economy looks rosy, but …

My observation arose mainly because so many economic variables are pointing to a positive 2018 and a continuation of the current expansion that, at 104 months, now ranks as the third-longest in post-WWII history. The most likely scenario for short-term prospects in 2018 includes faster growth in economic output closer to three percent annually, strong employment growth, and increasing wages and household income. And, at least in 2018, the strong fiscal stimulus from Trump’s federal tax cuts appears to solidify these prospects for growth. This outlook will most certainly propel the current economic expansion into second place.

GDP Growth

However, most economic disruption happens on the margin, and the probability for a turn for the worse in 2018 is not zero. At worst, a downturn might be a 50-50 proposition—but it is something to keep watching for to avoid too much of a surprise.

… beware of those black swans!

So in my view, if a recession does surprise us in 2018, you can look to one or more of the following black swans as potential contributors:

  • Global conflict. The risk to the US economy that is easiest to identify is the potential for a major conflict with North Korea or escalation of conflict in the Middle East.
  • A slowdown in consumer spending. A strong job market, increasing wages, and improved home prices should keep consumer spending growing at a modest pace. But we should avoid becoming blind to the uncertainty of the growing wealth and income inequity gap. Consumer credit balances will also be a significant deciding factor in the potential of a pronounced slowdown in spending.
  • Increased tightening of monetary policy. I expect that the Federal Reserve will continue raising interest rates in 2018 with the expectation that inflation needs to be controlled as a result of rising wage rates. We are clearly at full employment in the current cycle, and continued job growth will tighten the labor market even further. Higher interest rates in 2018 are highly likely, and the uncertainty is how households and capital markets will respond.
  • The 2017 tax cut plan. Most tax benefits under the plan accrue to corporations and high-income households. Corporate benefits will most certainly keep the stock market growing, or at least support its current pricing, and should continue creating jobs. But accumulated wealth among the wealthy tends to be hoarded with lower propensity to consume among these households. More importantly, the significant federal debt created under the plan is not sustainable and the ultimate cost of the plan could mitigate some of its benefits.

What We Know Right Now

When things are going well, those in the business of making predictions are naturally drawn to considering possible negatives. However, the 2018 US economy is currently strong: consumer confidence is high, people are working, income and wages are up, stock markets are performing well overall (even with recent volatility, current stock prices remain at historic highs), and the 2017 tax reductions hold the promise of powering significant private investment. So, black swans aside, I think it’s safe to expect the US economy to trend positive for the next several quarters.

For more information on economic research, analysis, and strategy, contact GAI Community Solutions Group’s Chief Economist Steven McDonald, CVA at 321.319.3099.

Steven McDonald, CVASteven McDonald is an economist, researcher, and strategist with 25 years of consulting and corporate experience. He specializes in quantitative and qualitative research and analysis to include economic analyses and econometrics, business valuation, forecasting and strategic planning, revenue optimization and pricing, utility rate design, and short- and long-term financial analyses.

Steven McDonald, CVA draws his conclusions and forms his opinions through his own analyses or calculations. The readers’ acceptance of this article is based on his expertise.

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