Monthly Economic Outlook - October 2018

U.S. Overview

International Overview Solid Growth Despite Being Late in Economic Cycle

The general theme of a U.S. economy growing above potential in the near term before gradually losing momentum remains more or less intact. The incoming data over the past month have been broadly positive, though admittedly sometimes a mixed bag, and we have updated our forecast accordingly.

Our full-year GDP growth numbers for this year, 2019 and 2020 are unchanged at 2.9%, 2.8% and 2.2% respectively. Our forecast for third quarter GDP growth benefited from a slight upward revision. We now expect the economy grew at a 3.3% annualized rate in the period, up from just 3.1% in our September forecast. Some of the faster Q3 growth is “borrowed” from the current quarter, and we have pared our estimate for Q4 by just a tenth of a percentage point to 2.7%.

Real personal consumption is shaping up a bit stronger than we had anticipated previously and the indicators in this sector have been broadly positive. Retail sales for August came in a bit weaker than expected, but upward revisions to prior data indicated that retailers were having a good year ahead of the key holiday shopping season.

Consumer confidence is firming as well; though the measures of just how well the consumer is faring vary slightly between the two bellwether measures. Michigan consumer sentiment rose to a six-month high, but the Conference Board’s consumer confidence index rose to a new cycle high of 138.4. The last time this measure of consumer confidence was as high as it is today was in the year 2000. A number of financial and economic indicators from that era are similar to where they are today.

International Overview

Global Growth Stirs Beneath a Calmer Surface

The global economy maintained a steady and solid pace during the first half of 2018, with Q2 GDP growth for the G20 economies at 3.9% year-over-year, near the fastest rate of growth since mid-2011. Still, this relative calmness on the surface masks some areas of instability among the details. U.S. growth has been particularly strong this year, boosted by fiscal stimulus, but growth for the other G7 economies has slowed noticeably. There is also a similar split among the emerging economies, with areas of both strength and weakness.

There are some important downside risks that could lead to a faster global slowdown. Trade tensions between the U.S. and China have continued to escalate, although the latest data for July (which captures the early rounds of tariffs) shows a stillrespectable pace of export volume growth. Meanwhile, there are hints of stronger wage growth starting to emerge from some of the major economies. Were that to lead to a more rapid removal of monetary policy accommodation than we currently expect, that could unsettle markets and hurt global economic growth.

There are some reasons for optimism as well. The recently announced trade agreement between the U.S., Canada and Mexico has perhaps eased trade tensions at the margin, and boosted our outlook for the Canadian economy. Meanwhile, with only moderate financial headwinds and as Brexit uncertainty lessens, we expect Eurozone and U.K. growth will firm going forward. Our overall global GDP growth forecasts are unchanged from last month—we see a modest slowing to 3.7% in 2019 and 3.4% in 2020.

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