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Sunday, December 22, 2019

Review: Ten Economic Questions for 2019

by Calculated Risk on 12/22/2019 12:36:00 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).

Here is review (we don't have all data yet, but enough).  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 November NAR report on existing home sales, inventory was down 5.7% year-over-year in November, and the months-of-supply was at 3.7 months. Early in the year, it appeared inventory would be up year-over-year, but with the decline in mortgage rates, inventory declined. This leaves inventory at a fairly low level.

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%."
The CoreLogic data for October showed prices up 3.5% year-over-year. The September Case-Shiller data showed prices up 3.2% YoY. So price gains did 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 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 November, starts were up 0.6% year-over-year compared to the same period in 2018.  New home sales were up 9.6% year-over-year through October.   Both starts and new home sales will be up year-over-year in 2019.

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 November 2019, nominal hourly wages were up 3.1% year-over-year. Wages disappointed in 2019 and will likely be somewhat below my forecast of 3.5%.

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."
This was incorrect.  The Fed cut rates three times in 2019.

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.
Several measures of inflation are slightly above the Fed's target, however core PCE was only up 1.6% YoY through November.

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 3.5% in November, the participation rate was essentially unchanged from last December, and job growth was decent, but less than in 2018 or 2017.

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 November 2019, the economy has added 1,969,000 jobs, or 179,000 per month. This is slightly above my forecast, however job growth did 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 at a 3.1% annualized real rate in Q1, 2.0% in Q2, and 2.1% in Q3. Most forecasts are for sub-2% in Q4. In 2018 I was forecasting a pickup in growth - and that happened - and in 2019 year I expected 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.
Trade and immigration policies had some negative impact on the economy, and, as expected, the 2017 tax cuts completely failed to deliver on the Administration's promises (predictable).   But overall the negative impact was somewhat limited.

In general I was close on GDP, employment and house prices. I was wrong on the Fed, and housing performed somewhat better than expected.