Rate Hikes on Hold Until September, Global Economic Breather Affects U.S. Growth Momentum

Rajeev Dhawan

Rajeev Dhawan, Director, Economic Forecasting Center, J. Mack Robinson College of Business, Georgia State University

ATLANTA–The 35-day partial government shutdown was likely economically insignificant except for those who suffered delayed paychecks, according to Rajeev Dhawan of the Economic Forecasting Center at Georgia State University’s Robinson College of Business.

“The real bad news was the severe drop in retail sales in December,” Dhawan wrote in his “Forecast of the Nation” released this week. “With job growth in the 200,000-plus monthly range for the year, why did people scrimp on holiday spending?”

Dhawan suggests the negative wealth effect from what he characterized as “brutal” market losses in October and December dampened consumer desire for holiday spending, triggering what the forecaster described as an “alarming” drop in consumer expectations and CEO confidence.

“In an aging expansion, when the low-hanging fruit of investment has been picked clean, policy makers must be nimble. Net-net, the Federal Reserve is on hold for rate hikes until September,” Dhawan said.

Dhawan doubts the United Kingdom (U.K.) will leave the European Union on March 29 without agreements in place for future EU-U.K. relations. But, he anticipates negotiations will go to the wire. With the Bank of England preparing for a potential recession at home, Germany barely avoiding one, and Italian and French economies far from strong, Dhawan does not expect America’s Atlantic trading partners to provide global economic growth in 2019. This leaves China, he said.

China’s economy is in a serious slowdown and its monetary authority is trying to jump-start domestic consumption with cheap credit and other measures. But the biggest threat China faces is threatened escalation of the 10 percent U.S. tariff rate to 25 percent. The war of words between China’s General Secretary Xi Jinping and U.S. President Donald Trump is expected to be resolved soon, which is likely to help both economies continue to grow.

Highlights from the Economic Forecasting Center’s National Report:
• Expect GDP growth of 2.9 percent in 2018, followed by 2.5 percent in 2019, moderating further to 1.8 percent growth in 2020 and 1.6 percent in 2021.
• Investment growth will moderate from 6.9 percent in 2018 to 4.1 percent in 2019, then to 2.9 percent in 2020 and 2021. Monthly job gains will be 189,900 in 2019, drop to 107,200 in 2020 and 105,000 in 2021.
• Housing starts will average 1.258 million in 2019, 1.246 million in 2020 and 1.242 million in 2021. Vehicle sales will be 16.2 million in 2019, 15.8 million in 2020 and 15.6 million in 2021.
• The 10-year bond rate will average 3.1 percent in 2019, 3.4 percent in 2020 and remain in that range in 2021 following Fed rate cuts.t in 2021.