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Uncertainty for the U.S. economic outlook in 2019

February 2, 2019

 

 

The one word I would apply to the U.S. economy today, if I only had one word to use, is "uncertainty." And markets don't like uncertainty, so watch out, don't expect significant gains on Wall Street, where uncertainty is a dirty word. At the moment the economy is doing well. The latest jobs report from the U.S. Bureau of Labor Statistics counted 304,000 jobs added to the U.S. economy in January, significantly more than what many economists expected. The 4 percent unemployment rate in January was a slight increase at 4 percent from a low of 3.7 percent in November 2018, but 4 percent is still what most economists would consider as just about full employment. This rosy jobs report is in spite of the three week partial government shutdown in January. You can see the labor market tightening if you just go out in your community and see all the "hiring" signs in store front windows. I was in downtown Washington, DC recently and got a free chicken sandwich from a J.P. Morgan Chase food truck offering free sandwiches while passing out information about Chase jobs and inviting people to apply, a sure sign that employers are feeling the need to recruit in ingenious ways in a tight job market. In another sign of the tight labor market, I noticed my trash collection service having difficulty meeting their pickup schedules and I have to believe that it is not only weather related, but that they are having trouble keeping and attracting labor. No question, labor markets are tight, but a caveat, while labor markets are tightening, and wage rates have begun to edge up. there is no sign of fast rising wages as yet.

 

So where is the uncertainty in the economy? Well the biggest uncertainty in my opinion is the threat of a trade war - with China, and with Europe. This is a Trump inflicted uncertainty that could have grave consequences. It was a trade war that helped bring on the Great Depression of the early 1930s. Inflicting tariffs on imported Chinese and European goods and the likely result that our trading partners will retaliate on U.S. exports is a recipe for price hikes and the resulting decrease in buying power of U.S. consumers. And consumer buying power is crucial to maintaining the economy at a high level.

 

A second uncertainty is Federal Reserve policy on interest rates. To combat the great recession the Federal Reserve has followed a policy of low, near zero in fact, interest rates for ten years now. In that time the Feds balance sheet has ballooned with unprecedented purchases and holdings of U.S. government bonds, a tactic to keep the U.S. money supply high, overall interest rates low and longer term interest rates low relative to short term rates. That policy was the correct policy to follow in light of the financial crisis and the 2008-2009 great recession, but now that that recovery is essentially complete, the Fed will want to get back to a more normal holdings of government bonds in its portfolio, and more normal interest rate policy. But this will mean clawing back from its unprecedented expansionary policy. When and how fast the Fed will pare down its bond holdings and pursue interest rate hikes is an undeniable source of uncertainty. At its last meeting the Federal Reserve put interest rate hikes on hold, for the time being. But for how long is a big question. In that atmosphere, what are consumers likely to do? Should they decide to trim their credit card debt? Or should they buy and spend now before interest rates rise. Should they buy that house now. If not, will they qualify for the mortgage next year when interest rates are likely to be higher.

 

Uncertainties in Europe and China add to United States uncertainty. Brexit, the pending and confusing exit of Great Britain from the European Union, is likely to be a big blow to the British and to some extent the European Union's economy. Germany's economy may be slowing down, the Italian economy is in trouble, there are troubles in France, and Chinese growth rates are slowing. These are all U.S. trading partners and trouble for our trading partners is not helpful to the United States.

 

So hang on. Be careful. We may be in for a roller coaster ride.

 

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