Savannah Chamber

13 7 The recovery of housing markets and substantially more single-family homebuilding will boost profits for many home- related industries. Growth in spending for business equipment bodes well for profits earned by technology-oriented companies. In contrast, slightly lower oil prices will reduce the profits of energy producing companies as well as businesses that cater to their needs. Productivity growth is likely to be stronger in 2019 than it was in 2018, but still weak from a historical perspective. Productivity is a panacea for profits, wages, and the overall economy. The dollar will strengthen slightly in 2019, which will hurt profit growth based on overseas earnings. Tariffs, trade tension, and slower expansion of foreign GDP – especially in the EU and emerging markets – will limit sales prospects for many export-oriented companies. In addition, businesses' pricing power will not firm dramatically. It is also important to recognize that financial institutions' profit margins will be severely constrained by a much flatter than normal – possibly inverted, yield curve. International Trade Uncertainty about U.S. trade policy and tariffs adds considerable risk to the 2019 forecast. The baseline forecast assumes that a full-blown trade war is avoided, but trade tensions will remain high. In 2019, real exports and imports will grow faster than U.S. GDP, but imports will rise faster than exports. The 2019 trade gap will be larger than in 2018. Hence, net exports will be a negative factor in terms of 2019 U.S. GDP growth. The main obstacles to faster U.S. export growth are the same as in 2018: the strong U.S. dollar, trade tensions, and tariffs. In addition, foreign GDP growth will be slower in 2019 than in 2018. The main reason why imports will grow in 2019 will be the growth of households' disposable personal income. Higher incomes will prompt U.S. consumers to purchase more imported finished products and go on more trips abroad, but households' wealth-effect spending will be limited or absent in 2019. In 2019, U.S. export growth will be broadly based. There will be increases for both merchandise and services, but exports of services will grow faster than exports of goods. Additional tariffs and trade tensions, however, increases the chances that export growth will stall or reverse, potentially pushing the U.S. economy into recession as soon as mid-2019. In 2019, the U.S. dollar's value will be quite high, which limits prospects for U.S. exports. The U.S. dollar appreciation will continue throughout 2019, but additional appreciation of the dollar will be minor compared to what has already transpired. Inflation & Monetary Policy Consumer price inflation will increase by 2.5 percent in 2019, which is slightly lower than expected for 2018. That rate of inflation is above the level that the Federal Reserve appears to be targeting. Therefore, the Federal Reserve is very likely to increase policy interest rates steadily. In 2019, three 25 basis point increases in the federal funds rate target are expected. An even tighter job market, higher medical prices, and higher housing prices – rents – will justify those increases. It is important to note that the extremely flat – or possibly inverted – 2019 yield curve might cause the Federal Reserve to slow the pace of rate increases. Some of the usual drivers of inflation will be more intense in 2019 and others will be less intense, but there is no doubt that tariffs are inflationary. The pace of 2019 GDP growth will be 0.5 percentage points lower than in 2018, which reduces the prospects for higher inflation. Similarly, consumer spending will grow more slowly in 2019 than in 2018. Capacity utilization will be higher in 2019 than in 2018, but there is still excess capacity in some economic sectors. The strong dollar will help keep inflation at bay, but the dollar will not appreciate much further in 2019. The national unemployment rate is below 4 percent, which signifies that the nation's labor market is at – or beyond – full employment. Wage and benefit inflation therefore will be on the increase. In 2019, labor market conditions will continue to improve, but not enough to ignite rapidly accelerating inflation. Indeed, employment will grow more slowly in 2019 than in 2018. The bottom line is that the employment situation has improved to the point where labor market conditions will higher support inflation, but not rapidly accelerating inflation. Thus, the Federal Reserve needs to tighten monetary policy to prevent inflation from getting too much traction, but it does not need to do so too aggressively. Based on the 2019 forecast of sustained, moderating U.S. GDP growth, the Federal Reserve will continue to increase short-term policy interest rates in 2019. The federal funds rate target will rise to 3.5 percent by the end of 2019. At that point, short-term policy interest rates will be restrictive, but not overly so. Nonetheless, those rate increases will not be high enough to prevent inflation from exceeding its 2 percent target, but it will not exceed it by very much – 0.5

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