Consumption disruption in 2019?
The U.S. consumer has been a significant contributor to domestic economic growth in 2018. Will consumer consumption be hit by inflation in 2019?
The U.S. economy looks to finish 2018 with the strongest growth rate since the Great Recession that began 10 years ago. Our optimism wanes somewhat in 2019 as we forecast U.S. GDP growth stabilizing around 2.5% with the possibility of further deceleration during the year.
The strength of the U.S. economy set the pace for global growth during 2018. The U.S. looks to finish the year with its gross domestic product (GDP) growing 2.9%, one of the strongest rates since the Great Recession that began in 2008. This expansion was aided by the Tax Cuts and Jobs Act of 2017, an infusion of fiscal spending and strong confidence among consumers and businesses alike.
Our optimism about the economy wanes somewhat in 2019. We forecast U.S. GDP growth stabilizing around 2.5% with the possibility of further deceleration during the year. Our subdued outlook is based in part on U.S. Federal Reserve (Fed) monetary policy in the last few years. The federal funds rate increased 200 basis points (bps) from December 2015 through December 2018 to the current range of 2.25-2.50%.
The Fed has indicated that short-term interest rates are close to what it believes to be neutral, meaning that policy is neither loose nor restrictive. We believe slower economic growth and lower oil prices will keep inflation well contained in early 2019, leading the Fed to take a more dovish tone and ease its pace of quarterly rate hikes. We still anticipate up to two rate increases in 2019.
Interest rate hikes have a lagging impact on the economy and could have a lasting effect throughout 2019. U.S. growth also faces headwinds from the diminished benefits of the 2017 tax cuts and stimulus, as well as continued murkiness surrounding the country’s trade policy, which has been a headwind to confidence and economic growth over the past year.
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The opinions expressed are those of Ivy Investment Management Company and are not meant as investment advice or to predict or project the future performance of any investment product. The opinions are current through December 2018, are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. This commentary is being provided as a general source of information and is not intended as a recommendation to purchase, sell, or hold any specific security or to engage in any investment strategy. Investment decisions should always be made based on an investor’s specific objectives, financial needs, risk tolerance and time horizon.