Monthly Economic Outlook

U.S. Overview

The U.S. economy continues to maintain strong momentum headed into fall 2018. Nonfarm employment growth, consumer spending and capital goods orders suggest real GDP will grow at around a 3% pace during the third quarter, and we expect growth will remain close to that pace through 2019. Our forecast now extends through 2020, where we see growth moderating somewhat to 2.2%. The current expansion will become the longest on record if growth continues into the second half of 2019.

From a bottom up perspective the economy looks incredibly sound. Strong job growth, higher asset prices and a relatively high saving rate should continue to support consumer spending. Business fixed investment also looks set to grow solidly, with an emphasis on productivity enhancing investment. Inventories are relatively low and government spending looks set to improve modestly in coming quarters.

Forecasting economic growth this far into a business cycle is a bit perilous. Recessions are hard to see, even in real time, and even harder to predict several quarters into the future. Reforms enacted in the aftermath of the financial crisis and the generally slow start to the economic expansion have created a great deal of resiliency, and few of the obvious excesses that typically have preceded past recessions are present today.

We expect the Fed to continue nudging interest rates up a quarter point higher each quarter until the second half of 2019, when we believe the funds rate will be above its neutral rate. The yield curve is expected to remain positive, however, as long term rates rise modestly.

International Overview

In 2017, the global economy experienced a broad-based swing to the upside, as most advanced and developing economies experienced a synchronized pick-up in economic growth. In some ways, 2018 has been a bit more of a one-man show, as the U.S. economy has seen a marked acceleration this year. Conversely, many of the world's other major economies, such as the Eurozone, United Kingdom, Japan, Canada and China, have thus far been growing at a slower pace this year relative to 2017.

As we look to the coming quarters, the U.S. outperformance will likely continue in the near term as the fiscal stimulus from tax cuts and increased government spending flow through the economy. For the rest of the world, we look for a leveling off rather than a continued slide in economic growth. Central bankers in regions such as Europe and Japan have so far maintained very accommodative monetary policy, while policymakers in China have also taken measures to support growth. Looking a bit farther out, our preliminary forecast for 2020 has the gap between the United States and the rest of the world narrowing further as U.S. growth moves closer to potential.

Perhaps the biggest risk to the near-term global economic outlook is a continued movement toward a full-fledged trade war. Developments over the past month in this area have been mixed. United States negotiators appear to have reached a preliminary agreement with Mexico on NAFTA renegotiation, but a tri-party deal with Canada remains elusive. In addition, the Trump administration appears to be moving toward another round of tariffs on $200 billion of Chinese goods.

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