Federal Reserve Pauses Rate Actions, More Rate Cuts Predicted

ATLANTA–The U.S. economy is transitioning to a new growth path and production-level shocks in the system can derail its momentum, according to Rajeev Dhawan of the Economic Forecasting Center at Georgia State University’s Robinson College of Business.

One shock, the indefinite grounding of all Boeing 737 MAX planes, is domestic in nature and bad news for parts suppliers, especially in the face of already weakened corporate capital expenditures over the past six months. The other shock, stress on the world oil supply from geopolitical issues (warlord activity in Libya, unrest in Venezuela, U.S. sanctions on Iranian oil exports), is global.

“Shocks become a problem when the economy transitions to a new equilibrium, as it is now,” Dhawan wrote in his “Forecast of the Nation” released May 22, 2019.

2018’s strong growth rate was set in motion with the Tax Cuts and Jobs Acts of 2017, which, Dhawan said, “provided a type of fiscal stimulus, a positive change in the investment climate and job growth one-third higher in the first half of 2018 than the normal monthly job creation pace of 2017.”

The boost to investment spending petered out in the second half of 2018 because of numerous factors, chiefly stock market volatility from trade skirmishes and softening global growth. But other factors changed as well. The Federal Reserve undertook four rate hikes in 2018 but has paused further action since December. The length of the pause, and whether the Fed’s next action is a hike or a cut, will depend on how uneventfully the economy transitions to its new growth path. So far, the transition has been more eventful than not.

Retail sales were hit hard by a steep decline in the stock market. After growing 6.1 percent in the second quarter of 2018, retail sales moderated to just 1.0 percent by the fourth quarter.

As a result, “the positive income effect from rising job growth got wiped out by negative wealth effects emanating from stock market carnage,” the forecaster said.

Dhawan expects the Fed to begin rate cuts in December 2019, with a total of three by mid-2020.

As for tariffs on China, Dhawan said “The immediate impact is minor. Future impacts, especially reduced corporate desire for investment, will not be apparent for some time.”

Highlights from the Economic Forecasting Center’s National Report

  • GDP growth of 2.9 percent in 2018 will moderate to 2.6 percent in 2019, moderating further to 1.9 percent growth in 2020 and 2021.
  • Investment growth will moderate from 6.9 percent in 2018 to 3.7 percent in 2019, then to 3.4 percent in 2020 and rise to 3.6 in 2021. Monthly job gains will moderate to 179,100 in 2019, drop to 121,000 in 2020 and gain a similar 129,900 jobs in 2021.
  • Housing starts will average 1.221 million in 2019, 1.239 million in 2020 and 1.262 million in 2021. Vehicle sales will be 16.5 million in 2019, 16.0 million in 2020 and 15.9 million in 2021.
  • Even in the face of expected Fed rate cuts, the 10-year bond rate will average 2.7 percent in 2019, rise to 2.9 percent in 2020 and rise further to average 3.3 percent in 2021.