Fed funds range to remain unchanged at 1.75%-2.00%

U.S. Growth Outlook

Real GDP growth forecast for Q2-2019: 1.8% (seasonally adjusted annualized rate)

• Change since last Monthly Economic Outlook: -0.2 percentage point

• Commentary: Our forecast for Q2 growth is little changed. We project that personal consumption is on pace for a 3.4% annualized gain in Q2, reflecting some rebound from a weak Q1 reading. Government consumption and investment is tracking to grow 5.2%, which would mark the fastest annualized rate since Q2-2009. This strength is partly due to a bounce-back from the federal government shutdown earlier this year. Equipment spending looks poised to contract, as nondefense capital goods shipments have fallen sharply. Discounting the Boeing-related weakness, however, private capital goods shipments ex-aircraft continue to grind higher, although the pace of growth remains more tepid than in the first quarter. Spending on structures appears likely to decline in Q2 amid a pullback in energy-related investment.

Real GDP growth forecast for full-year 2019: 2.6%

• Change since last Monthly Economic Outlook: No Change

• Commentary: Our forecast for 2019 GDP growth is unchanged. Growth should be supported by personal consumption and government spending, while business investment growth should slow.

Key Themes and Upside/Downside Scenarios

• Upside scenario: Trade uncertainty across the globe dissipates after a U.S.-China deal is reached and the USMCA is passed. The global economy finds firmer footing amid increased confidence, and investment spending accelerates. After a transitory slowdown, inflation returns back to the 2% target.

• Downside scenario: Trade tensions come back to the fore and uncertainty continues to have both direct and indirect negative effects on the economy. Another escalation in the trade disputes between the United States and its major trading partners drags global growth to its slowest pace since 2009, pulling the United States down with it.

Federal Reserve Watch

Inflation Forecast

• Inflationary pressure remains modest. We still do not expect core PCE inflation to return to 2% until 2020. The overall trend in inflation remains tame and continues to support the case for "insurance" cuts by the Fed.

Labor Market Forecast

• Employment growth rebounded in June, allaying fears of a sharp deterioration in the labor market. We expect employment growth to keep slowing gradually but remain strong enough for labor market tightening to continue. By our estimates, it takes job growth of about 100,000 per month to meet labor force growth and keep the unemployment rate steady.

Fed Funds Outlook

Fed Funds Forecast for 2019

• One 25 bps cut in July 2019, one 25 bps cut in Q4-2019

• The near-term risks surrounding trade have diminished and U.S. growth is expected to remain close to its potential rate. But, with muted inflation and less available ammunition than in prior expansions, we still think the Fed is likely to deliver two "insurance" cuts to forestall a sharper deceleration in GDP and prices.

Fed Funds Forecast for 2020

• Fed funds range to remain unchanged at 1.75%-2.00%

• If the data are in-line with our forecast, we do not believe further accommodation will be needed in 2020.

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