2018 likely will be remembered for achieving solid economic growth, a highly volatile stock market, and an emerging trade war with China. In 2019 we can expect slower growth, continued volatility, and China to resist significant market-based reforms. These and other factors, combined with an environment of political uncertainty, could create greater risks.
The U.S. economy is estimated to have grown by 3 percent in 2018. This rate is based on various components, including strong retail and construction sectors, and a real estate market that has slowed due to a housing shortage, rising mortgage rates, and high home prices, which have kept some buyers on the curb. And consumer spending, which represents 70 percent of U.S. output, is reflected in relatively strong, but slightly decreasing consumer confidence, says the Conference Board, a U.S. think tank.
The labor market is another issue that has real impact. The exceptionally low unemployment rate has been good for workers. But it has contributed to a labor and skills deficit that’s not good for businesses struggling to find them. Consequently, there are more than 7 million non-farm job openings that have not been filled, according to the Bureau of Labor Statistics.
Many industries, including manufacturing, construction and trucking, are experiencing the largest labor shortages in decades. If companies can’t find the employees and skills they need, they can’t grow resulting in downward pressure on economic growth.
But one of the biggest factors that will impact the U.S. economy in 2019 is international trade.
Although the changes are minimal and likely to lead to higher priced automobiles, the United States-Mexico-Canada Agreement, known as USMCA, if passed by Congress essentially resulting in a modified NAFTA, will help to reduce uncertainty and market volatility. And the likelihood that the U.S. and European Union can reach a favorable trade agreement in 2019 will be another step in the right direction.
But trying to get China to comply with all the demands made by President Trump will be unlikely by March 1—the end of the 90-day trade truce agreed to by Trump and Chinese President Xi at the G20 meeting in Buenos Aires on Dec. 1. And here’s why.
For decades, China has been subsidizing its state-owned enterprises thereby giving then an unfair competitive advantage, pressuring U.S. companies to hand over technology in exchange for market access, and placing market restrictions on U.S. companies. In addition, enforcement of Chinese intellectual property protection laws have been weak resulting in lost profits for American firms.
To adequately address many of these concerns, as well as achieve higher levels of sustainable economic growth, China needs to press ahead with many market-based economic reforms it agreed to implement when it joined the World Trade Organization in December 2001. But the speed at which this might occur, if at all, could have positive or negative consequences.
For example, Beijing should eliminate subsidies from its 100,000 state-owned enterprises, many of which underperform and put a drag on its economy. But to do so too quickly could cause unemployment and social unrest to rise—something feared by the ruling Communist party. On the other hand, reforms initiated slowly that in the long run would alleviate trade tensions may not satisfy the White House timetable.
How Trump perceives China’s offer in March and presents it to his base will determine if it is a win for the administration or a reason to ratchet up the trade war that could turn into a cold war. And the latter would generate greater uncertainty and volatility—the enemy of prosperity.
In turn, American investors and consumers would be inclined to spend less putting downward pressure on U.S. economic growth.
The Federal Reserve and The Wall Street Journal’s Economic Forecasting Survey predict the U.S. growth rate will decline to 2.3 percent in 2019. This is based on metrics we can see and analyze.
But it’s the direction of U.S.-China trade and relations, political uncertainty, volatility in the stock market, or a combination of factors that could create new risks affecting the economy. As a result, 2019 will require American consumers, households, businesses and investors to operate very cautiously.