What is in store for the U.S. economy in 2019? On the heels of a 35-day government shutdown, leading economic experts shared their insights at the 2019 Economic Forecast on Feb. 19, sponsored by the University of Delaware’s Alfred Lerner College of Business and Economics’ Center for Economic Education and Entrepreneurship (CEEE) and the Lyons Companies. Video from the event is available on the Lerner College Facebook page.
Loretta J. Mester, president and chief executive officer of the Federal Reserve Bank of Cleveland, served as keynote speaker and joined a dynamic panel that also included Michael K. Farr, author, CNBC contributor and president of Farr, Miller & Washington, LLC and Joan K. Woodward, president, Travelers Institute and executive vice president for public policy with The Travelers Companies, Inc. Jon Hilsenrath, chief economic correspondent for The Wall Street Journal, served as moderator. Predictions covered employment growth, consumer confidence, income inequality and immigration.
2019: A Year of Transitions
Loretta J. Mester
“If I had to choose a banner headline, I would characterize 2019 as a year of transitions, for the economy, for monetary policy, and for how we communicate about policy,” said Mester as she led off the economic forecast predictions.
The Economy:
- From the perspective of the congressionally mandated goals for the Fed, including maximum employment and price stability, the U.S. economy has performed well.
- Household incomes have been rising. This reflects the strength of the job market and lower taxes. The business sector also remains sound, with favorable profits and lower taxes.
- Employment growth will likely slow but remain strong enough to absorb those entering the workforce. The unemployment rate should remain at or below 4%. Growth will continue to transition at a more sustainable pace, however, risk factors like slowed global growth, trade policy, financial condition, business sentiment and consumer sentiment could affect this prediction.
Monetary Policy:
- The Federal Open Market Committee (FOMC) decided to keep the target range for the federal funds rate at 2.25 to 2.5% in its January 2019 meeting. Mester supports the “wait-and-see” approach for future rate adjustments that the Fed has adopted.
- The Fed is transitioning back to normal monetary policymaking for the policy rate setting and the balance sheet.
Communication of Policy:
- In order to be held accountable, policymakers must explain their decisions, assessment and outlook for the economy, as well as the perceived risks to that outlook. Clear communications make monetary policy more effective.
- Monetary policy communications are transitioning to focus more on the economic and financial information that affects the medium-run outlook.
2019: Possible Recession Looming
Joan K. Woodward
“We’re gonna talk a little politics today,” said Woodward as she began her talk. “As you just heard, this is a year of transition and I certainly agree with that. Also, politically what’s going on and how to think about the economy vis-à-vis what’s happening in the political world. Then corporate thought leadership in Washington, D.C. and how companies like Travelers operate in that type of environment.”
- Woodward noted that, as of February 19, the unemployment rate was at historic lows. In December 2018 wage growth exceeded the unemployment rate for the first time in over a decade. Woodward’s data showed that in the last 50 years when the yield curve has inverted like this, a recessionary period has followed between 6 to 18 months later.
- Low consumer sentiment is a leading economic indicator. The market took a beating and consumer sentiments went down in December 2018 and January 2019 but came back up to 95.5% in February 2019. This increase is likely connected to the end of the government shutdown.
- Travelers is a leading insurer of small business in the U.S. and they notice when consumer confidence is down. A significant drop-off in the small business confidence index is concerning.
- As a car insurance company as well, Travelers pays attention to when people buy new cars and insure them. A record 7 million Americans are now three months behind on car payments, which could be an economic indicator to watch.
- “According to the World Bank, in 2026 China will overtake us as the largest economy in the world. Why does that matter? We’re in a trade war with China…these trade negotiations are hugely important to both the U.S. and the world.”
2019: A Volatile Year for the Markets
Michael K. Farr
“I’m going to ask you to please turn off your political ears,” asked Farr while introducing the topics of his presentation. “When I talk about immigration, I’m not talking as a Republican or a Democrat, I’m talking about the economic implications of immigration. When I tell you that tariffs are not a good idea economically I’m not making a political comment.”
- Trade and immigration policies are unlikely to support growth and instead can cause inflation and labor shortages. With a reduced U.S. fertility rate, immigration is hugely important for the labor market.
- Following a couple of strong quarters of fixed income, investment grounded to a halt and residential investment has been weak all year. After nine years of near-zero interest rates consequences are beginning to come to the surface now.
- The average S&P 500 company has doubled its debt on the balance sheet over the past 10 years. With that money, companies didn’t invest in equipment or employees. Instead, they participated in stock buybacks. The U.S. debt is growing and the U.S. is spending $80 billion more than it brings in each month. The debt could be well over 100% of GDP in the near future.
- The bond market is telling a different story than the stock market. Higher interest rates, fiscal stimulus, impotency, trade and immigration-related uncertainty, slower growth and increased market volatility are in the forecast for the coming year. There is still a runway for the continued growth of a reasonable stock market but there hasn’t been a recession in over 10 years so that runway may not last for much longer.
- “We have people like Dr. Mester who are spending their lives working on this country’s economic growth, we are so fortunate that you can’t bet against this country.”
- The future pace of economic growth is going to be limited for the next few years. The market was up 8 or 9% already in 2019. This is an increase of 17% from the lows of December 2018 which shows that, in aggregate, the consumer is healthy. However, economic growth is expected to be slow, perhaps materially.
Recognizing an Outstanding Economic Educator
The 2019 Economic Forecast event recognized Amy Walls, assistant community reinvestment act director for Discover Bank, with the 2019 James B. O’Neill Award. This award, named in honor of past CEEE Director and Master of Arts in Economics and Entrepreneurship for Educators program founder Professor Emeritus Jim O’Neill, recognized Walls as an individual who has made substantial contributions in promoting economic, personal finance and entrepreneurship education.
Throughout her career, Walls has worked to support, deliver and increase access to high-quality financial education throughout Delaware. Most recently, in collaboration with the Delaware Council on Economic Education, Walls has played a significant part in the launch of Delaware. -money, a website that aggregates adult financial education resources. A respected and long-standing champion of financial education in Delaware’s K-12 community, Walls’ contribution has been instrumental in furthering the mission of the CEEE.
Remembering David Lyons
Farr took a moment to honor the memory of the CEO and founder of the Lyons Companies, David Lyons, who passed away in April 2018. His speech brought the audience to their feet in a round of applause to honor the late founder of the Economic Forecast.
“David Lyons made a difference in his life, a big difference,” Farr said. “David Lyons thought that the Center for Economic Education and Entrepreneurship was important. David Lyons thought that Delaware was important. David Lyons thought that his community was important. David Lyons thought that his friends were important. David Lyons thought that his clients at Lyons Insurance were very important.
“When you consider from time to time the difference that our lives make, the pebble that gets thrown into the water and sends ripples, we’re all here because of David Lyons,” Farr continued. “We’re all here because he had an idea. We’re all here because he joined forces with Jim O’Neill and said, ‘Entrepreneurship is something that we have to focus on in this state and in this country,’ and he made a difference. I was going to say, ‘Can we have a moment of silence for David’ but David didn’t do silence very well, that didn’t seem appropriate. So will you all join me in a round of applause for David Lyons?”