Arthur J. Villasanta – Fourth Estate Contributor
Washington, DC, United States (4E) – The U.S. economy is facing a growing number of headwinds that will slow down the pace of economic growth. In addition, the certainty of an interest rate hike in December is also fueling uncertainty about the economy continuing on a robust growth path,
Economists estimate the U.S. gross domestic product (GDP) will expand at an annualized rate of 2.7 percent in this fourth quarter. This growth is far lower than the 4.2 percent in the second quarter and 3.5 percent in the third.
On the upside, the 3.5 percent GDP hike in Q3 still puts the economy on pace for the fastest annual growth in 13 years. The economy has been expanding in the 2 percent range over the past few years.
On the downside, GDP growth is forecast to slow from 2.0 percent to 2.5 percent throughout 2019. It will then decelerate to 1.8 percent by mid-2020, about half the latest reported rate. In October, the Federal Reserve boosted its growth projection to 3.1 percent for 2018, but it saw growth slowing to 2.5 percent in 2019.
Economists said overall growth in Q3 might have been partly affected by Hurricane Florence, which flooded the Southeast U.S. in September. The Department of Commerce said Florence caused losses estimated at $37 billion in property and equipment. Hurricane Michael, which plowed through the Florida Panhandle and Georgia earlier this month will lower fourth quarter GDP.
Analysts said the main risk to the upside is likely the tight jobs market and whether wages can continue rising. As a result, some economists see U.S. economic growth decelerating through 2019.
Despite a robust economy and high employment, the Fed is widely expected to increase interest rates again in December and should do so three times in 2019. Economists believe the Fed will slow down the pace of its interest rate hikes so as not to hamstring an economy on a strong growth curve.
In a new poll, a panel of economists unanimously agreed the Fed will raise the federal funds rate by 25 basis points to 2.25% to 2.50% in December. Median forecasts reveal at least three increases in 2019, which will see the federal funds rate rise to 3.00 percent to 3.25 percent by end-2019. But a third rate hike in 2019 is uncertain, however, with 54 of the 102 economists in the survey forecasting that outcome.
The poll showed a wide degree of uncertainty among the economists as to the nature and timing of the rate hikes. The range of forecasts around how much the Fed will raise rates next year was unexpectedly wide. One economist expected no change to rates at all in 2019 while another predicted a significant 50 basis point hike at the June 2019 meeting.
An economic recession is definitely in the cards, but the uncertainty is when this feared outcome will occur. Twelve respondents in the newest poll said there was a greater than 50 percent chance of a recession in the next two years.
The probability of a U.S. recession by 2020 remains low. But the risk of one occurring rose to a median 35 percent from 30 percent in the latest monthly survey of economists taken last week. It’s remained at 15 percent for the next 12 months.
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