GDP Report Points To Solid Economic Forecast For 2019

Foreign trade was not a big factor in last quarter’s economic growth, with both exports and imports growing at about the same pace. This sector is uncertain now, with European economies mostly decelerating and businesses not sure what Brexit will mean, on either side of the English Channel. China’s economic growth is slowing but not cratering, though we distrust the country’s statistics. Trade policy, of course, is highly uncertain, but it seems a good bet that President Trump will cut a deal with China that avoids disaster.

The final part of the GDP calculation is government spending. Federal spending decelerated a good bit in the fourth quarter. (Keep in mind that the GDP calculation does not count transfer payments such as Social Security.) State and local government spending actually dropped a hair. All government spending is likely to be a bit stronger in the coming quarters.

The demand side of the economy will be in good shape in 2019. The supply side will struggle to keep up. Labor is in tight supply, and many of the people being hired were rejected in past years. They will eventually be productive workers, but it will take a while. The overall productivity trend has been low growth in recent years. Greater use of machinery, computers and software will boost output per worker, but the pace of productivity growth will be restrained until the new workers hired in recent years come up to speed.

With the demand side of the economy brighter than the supply side, look for rising prices in many areas. The Federal Reserve currently expects little change in policy in the coming months, followed by mild increases. I bet they will get nervous as more data come out about inflation, and thus I expect more increases in interest rates over the course of 2019 and 2020.

It's a good, solid economic forecast.

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