The US Economy Grew At 3.5% in 2018, Shutdown Might Affect 2019

The US economy continued to register strong growth with the growth for Q3’2018 coming in at 3.5 percent, slower than the 4.2 percent recorded in Q2’2018, but faster than the 2.8 percent recorded in Q3’2017.

The growth has largely been attributed to the Trump administration’s USD 1.5 trillion tax cut package, which has boosted consumer spending, and consequently supported business investment, as shown by the increased overall inventory accumulation.

The labor market has remained strong, with Non-Farm Payroll (NFP) increasing by 155,000 in November 2018, and at an average monthly increase of 192,000 during the year. This has seen the unemployment rate remain at a 49-year low of 3.7 percent. Wage growth has also remained strong, coming in at a 0.9 percent q/q increase, and a 3.1 percent y/y increase, the highest since June 2009.

The Federal Reserve has continued implementing its tighter monetary policy, having started on a tightening cycle in December 2016. In 2018, the Fed implemented four hikes, of 25 bps each, in March, June, October, and December, with the Federal Funds rate ending the year at a band of 2.25 – 2.50 percent, from a range of 1.25 – 1.5 percent at the beginning of the year.

During the year, there was a strong labor market, with an average of 192,000 new jobs added every month during the year and the unemployment rate at lows of 3.7 percent in December, compared to 5.0 percent unemployment rate that is considered full employment in the US economy.

The US economy experienced a relatively strong annual economic growth, which is projected to come in at 2.9 percent in 2018, higher than 2.3 percent recorded in 2017, driven by increased consumer spending.

There was a desired rate of inflation in the economy. On a 12-month basis, both overall inflation and inflation for items other than food and energy have remained near the government’s preferred level of 2.0 percent coming in at 2.2 percent in November 2018.

The stock market in the US registered declines, with the S&P 500 declining by 6.2 percent, as 9.0 percent  YTD gains to September 2018 were eroded during the fourth quarter of the year.

The gains in the first 9 months of the year were supported by strong growth in corporate earnings, and expected implementation of pro-growth policies under the administration of President Trump, including tax reforms that have resulted in corporate tax rates falling to 21.0 percent from 35.0 percent, with the administration indicating the possibility of further tax declines.

However, for the fourth quarter of the year, stock markets posted declines as increased concerns of a slower global economic growth, tighter monetary conditions, increased trade, and geopolitical tensions, and the possibility of an economic recession in the US in 2019 dampened investor sentiment.

In terms of valuations, the Cyclically Adjusted Price/Earnings (CAPE) ratio is currently at 29.0x, 72.6 percent above the historical average of 16.8x, indicating the market albeit on a declining trend, remains overvalued relative to historical levels.