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Friday, July 12, 2019

Q2 Review: Ten Economic Questions for 2019

by Calculated Risk on 7/12/2019 03:42:00 PM

At the end of last year, I posted Ten Economic Questions for 2019. I followed up with a brief post on each question. The goal was to provide an overview of what I expected in 2019 (I don't have a crystal ball, but I think it helps to outline what I think will happen - and understand - and change my mind, when the outlook is wrong).

By request, here is a quick Q2 review. I've linked to my posts from the beginning of the year, with a brief excerpt and a few comments:

10) Question #10 for 2019: Will housing inventory increase or decrease in 2019?

"I expect to see inventory up again year-over-year in December 2019.   My reasons for expecting more inventory are 1) inventory is still historically low (inventory in November 2018 was  the second lowest since 2000), 2) higher mortgage rates, and 3) further negative impact in certain areas from new tax law."
According to the May NAR report on existing home sales, inventory was up 2.7% year-over-year in May, and the months-of-supply was at 4.3 months. It is early, and the inventory build has slowed recently as mortgage rates declined, but I still expect some increase in inventory this year.

9) Question #9 for 2019: What will happen with house prices in 2019?
"If inventory increases further year-over-year as I expect by December 2019, it seems likely that price appreciation will slow to the low single digits - maybe around 3%."
If is very early, but the CoreLogic data for May showed prices up 3.6% year-over-year. The April Case-Shiller data showed prices up 3.5% YoY - and slowing.  Currently it appears price gains will slow in 2019.

8) Question #8 for 2019: How much will Residential Investment increase?
"Most analysts are looking for starts and new home sales to increase to slightly in 2019. For example, the NAHB is forecasting a slight increase in starts (to 1.269 million), and no change in home sales in 2019. And Fannie Mae is forecasting a slight increase in starts (to 1.265 million), and for new home sales to increase to 619 thousand in 2019.

My sense is the weakness in late 2018 will continue into 2019, and starts will be down year-over-year, but not a huge decline.  My guess is starts will decrease slightly in 2019 and new home sales will be close to 600 thousand."
Through May, starts were down 5.3% year-over-year compared to the same period in 2018.  New home sales were up 4.0% year-over-year.   It is early, but it appears starts will be down slightly or flat this year, and new home sales will be up.

7) Question #7 for 2019: How much will wages increase in 2019?
"As the labor market continues to tighten, we should see more wage pressure as companies have to compete for employees. I expect to see some further increases in both the Average hourly earning from the CES, and in the Atlanta Fed Wage Tracker. Perhaps nominal wages will increase close to 3.5% in 2019 according to the CES."
Through June 2019, nominal hourly wages were up 3.1% year-over-year. It is early, but so far wages have disappointed in 2019.

6) Question #6 for 2019: Will the Fed raise rates in 2019, and if so, by how much?
"My current guess is just one hike in the 2nd half of the year."
It now appears the Fed will cut rates a few times this year.

5) Question #5 for 2019: Will the core inflation rate rise in 2019? Will too much inflation be a concern in 2019?
The Fed is projecting core PCE inflation will increase to 2.0% to 2.1% by Q4 2019.  There are risks for higher inflation with the labor market near full employment, however I do think there are structural reasons for low inflation (demographics, few employment agreements that lead to wage-price-spiral, etc).

So, although I think core PCE inflation (year-over-year) will increase in 2019 and be around 2% by Q4 2019 (up from 1.9%), I think too much inflation will still not be a serious concern in 2019.
It is early, but inflation several measures of inflation are close to the Fed's target, however core PCE has been soft.

4) Question #4 for 2019: What will the unemployment rate be in December 2019?
Depending on the estimate for the participation rate and job growth (next question), it appears the unemployment rate will decline into the mid 3's by December 2019 from the current 3.7%. My guess is based on the participation rate being mostly unchanged in 2019, and for decent job growth in 2019, but less than in 2018 or 2017.
The unemployment rate was at 3.7% in June.

3) Question #3 for 2019: Will job creation in 2019 be as strong as in 2018?
So my forecast is for gains of around 133,000 to 167,000 payroll jobs per month in 2019 (about 1.6 million to 2.0 million year-over-year) .  This would be the fewest job gains since 2010, but another solid year for employment gains given current demographics.
Through June 2019, the economy has added 1,033,000 thousand jobs, or 172,000 per month. This is slightly above my forecast, and it appears job growth will slow this year compared to 2018.

2) Question #2 for 2019: How much will the economy grow in 2019?
"Looking to 2019, fiscal policy will still be a positive for growth - although the boost will fade over the course of the year, and become a drag in 2020.   And oil prices declined sharply in late 2018, and this will be a drag on economic growth in 2019.   Auto sales are mostly moving sideways, and housing has been under pressure due to higher mortgage rates and the new tax plan.

These factors suggest growth will slow in 2019, probably to the low 2s -and maybe even a 1 handle."
GDP growth was solid in Q1 at 3.1%, although the underlying details were weaker than the headline number. Forecasts for Q2 are around 1.5%. Last year I was forecasting a pickup in growth - and that happened - and this year I expect growth to slow.

1) Question #1 for 2019: Will Mr. Trump negatively impact the economy in 2019?
My forecasts are based on a limited negative impact from Mr. Trump - and I hope that remains the case.   But he is a key downside risk for the economy.
This week, Fed Chair Powell highlighted trade and immigration policies as headwinds for the economy. It appears the administration's policies are starting to negatively impact the economy.

The Fed will probably lower rates this year, and it appears new home sales might be higher than I originally expected, and inflation is lower than I expected.