Economic Insights - January 2019

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As Business Briefings explained, at the beginning of 2018, the underlying U.S. economy would remain impervious to threats which would roil the global economy.  As it turns out, nothing that has been thrown at the economy, including trade conflicts, short-term interest rates, and stock market corrections, has pierced its armor.  And this is likely to remain true in 2019.

A year ago, the economic consensus was that real U.S. GDP would grow 2.5 percent in 2018, even after the tax cuts were passed.  By contrast, we were more optimistic, projecting that real GDP would be up 3.5 percent in 2018.  If we plug in the Atlanta Fed’s estimate of 2.7 percent for fourth Quarter growth, we get 3.1 percent for the year. 

Our view is that the widespread drag created by fighting the trade wars was offset by the early impact of deregulation and the tax cuts. 

If you have doubts, consider the 2018 Christmas shopping season.  American Consumers spent more than $850 billion online and in stores, the strongest showing in six years.  Those sales also represent a 5.1 percent increase from the 2017 holiday shopping season.  According to Mastercard:

  • Total apparel had a strong season with a growth rate of 7.9 percent compared to 2017, recording the best growth rate since 2010.  And,
  • Home improvement spending continued to surge with spending up 9.0 percent.

From shopping aisles to online carts, consumer confidence translated into holiday cheer for retail.

To satisfy all that demand U.S. Manufacturing PMI remained at a healthy 54.1 in December.  Meanwhile, the U.S. Non-Manufacturing PMI remained at a very strong 60.7 percent.  This shows no sign of a slow-down.
Now, the same consensus that a year ago suggested the economy would only grow 2.5 percent in 2018 despite the tax cuts, is saying the economy is going to slow from a 3.1 percent pace in 2018 to a 2.3 percent pace in 2019, in part because of the supposed reduction in stimulus related to those very same tax cuts.

Once again, we’re not buying the consensus.  The benefits to growth due to having a lower tax rate on corporate profits and less regulation are going to take several years to fully play out.  Companies and investors around the world...

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