The State of the US Economy

2018 is setting up to be an interesting year for the United States economy.  Following a relatively strong 2017, there are hopes that the world’s largest economy can maintain the momentum that it built up last year and record even higher levels of growth in 2018.  In fact, the US economy is in the midst of an extremely prolonged expansion, something that is often overlooked as a result of the fact that growth rates in the US have not been able to rise to the heights that they reached before the financial crisis.  Given the length of this expansion, it had been expected that the US economy would slow in the near future.  However, the recent tax cuts enacted in the US and a favorable external economic climate have raised expectations of more solid growth for the US economy in the coming year.  While growth may remain relatively strong in 2018, there are also a number of risks that need to be monitored, risks that could jeopardize the US’ continued growth.

In the fourth quarter of last year, economic growth in the United States slowed slightly on an annualized basis, falling to 2.6% during that period.  On a year-on-year basis, this represented a rate of growth of 2.5%, the highest year-on-year economic growth in the US since the first half of 2015.  As a result, the United States economy expanded by 2.3% for the year in 2017, a rate of growth that was in line with our forecasts prior to the year.  In the latter part of last year, the US economy lost a little of its momentum due to a downturn in private inventory investment.  On the other hand, export growth was boosted by a weaker US dollar and higher demand levels in many key export markets.  Likewise, government spending rose in the fourth quarter of last year.  Overall, the US economy performed relatively well in the final months of last year, but once again not all cylinders of the US’ economic engine were firing at the same time.

As a result of a favorable external climate and the expected near-term impact of the recent tax cuts, the United States economy is forecast to continue to record relatively strong rates of growth over the near-term.  However, there are a number of internal and external risks that could derail the US economy in the months ahead.  For example, there are growing concerns that equity valuations could lead to a sharp stock market correction in the coming months, something that would reduce the prospects for economic growth in the US.  Another risk stems from the potential for a sharper-than-expected increase in inflation rates in the coming months.  At the same time, the potential for an even higher degree of political uncertainty, both within the United States and internationally, is rising and this could severely damage business and investor confidence at some point later this year.  Finally, the relatively healthy global economy has helped to boost growth in the US, but risks are mounting in many of the world’s other leading economies, including in China, Europe and Japan. 

While we are forecasting another year of relatively strong growth, there is an increasing likelihood that the US economy, and many other developed economies, will experience a slowdown beginning in 2019.  Until this slowdown arrives, growth in the United States should remain relatively broad-based, with domestic demand boosted by rising wage levels and the impact of the recent tax cuts, and with export demand continuing to rise at a time when US export competitiveness has improved substantially.  Meanwhile, despite the rising threat of a slowdown towards the end of this decade, the United States economy remains better placed than nearly all other developed economies to record higher levels of growth over the long-term.  Nevertheless, without a major increase in productivity in the US, economic growth rates will remain below the levels achieved before the financial crisis, even if the US manages to continue to record growth in the coming years.