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7 The National Outlook for 2019 Jeffrey M. Humphreys, Director Terry College of Business University of Georgia The Terry College's 2019 U.S. economic forecast indicates that the economic upturn that began in the second half of 2009 will continue. The rate of 2019 GDP growth – 2.5 percent – will be noticeably slower than in 2018 – 3.0 percent, and below the average of the last 50 years – 2.9 percent. The severity of the "Great Recession" and the sub-par pace of economic growth over the course of the nine year-long expansion caused excesses to develop slowly, but excesses did develop. Domestically, the main imbalances include, too much leveraged lending to nonfinancial businesses, high asset prices, tight labor markets, and high federal budget deficits. Absent a major shock, or policy mistake, the U.S. economic expansion therefore is likely to continue. The main risks to U.S. GDP growth are a (1) full-blown trade war, (2) excessive risk taking in the form of leveraged lending and junk grade corporate bonds, (3) overvalued U.S. equities, (3) overly restrictive monetary policy, and (5) contagion from financial/economic crises in one or more developing countries. In 2019, consumer spending, gross private domestic investment, and industrial production will contribute to U.S. GDP growth. Indeed, investment spending by businesses is likely to grow faster in 2019 than in 2018. Spending by government will be a positive factor in terms of 2019 U.S. GDP growth. The inventory swing also will be a positive factor. The main reasons why U.S. GDP growth will be slower in 2019 than in 2018 are: (1) higher interest rates, (2) tariffs and trade tensions, (3) smaller – or negative – wealth effects, and (4) lower levels of confidence. Despite faster income growth, consumer spending will grow more slowly in 2019 than in 2018. Consumers will no longer lead the economic expansion, but will support GDP growth. Absent large increases in households' net worth, the 2018 personal savings rate – 7 percent – is slightly too low. Household wealth is unlikely to increase very much in 2019. Thus, the personal savings rate will rise to about 8 percent in 2019. That is a headwind – albeit weak – for the U.S. consumer sector. Nonetheless, for this late in the business cycle, households' balance sheets are in surprisingly good shape. Across all businesses, corporate balance sheets are not as strong as a few years ago, but should be manageable as long as interest rates do not increase very quickly. Even so, it is very worrisome that many highly leveraged large businesses have taken on considerable debt. These leveraged loans typically have floating interest rates. Highly leveraged companies therefore are vulnerable to interest rate shock. Small businesses' finances are in comparatively good shape. Small business lending should expand solidly in 2019. Put it all together, the credit markets should be supportive of growth with credit growing through 2019, but recent very rapid growth in lending to highly leveraged businesses represents a serious risk to the U.S. economic expansion. A related risk is the size of the junk corporate bond market. Excessive risk taking is clearly taking place in these two areas of the financial system, which makes the U.S. economy increasingly vulnerable to recession. The Federal Reserve's monetary policy stance will be restrictive as it raises short-term policy interest rates above the rate of inflation. For the first time since the recovery began, the inflation-adjusted federal fund rate target will be positive. The federal funds rate target is expected to reach 3.25 percent in December 201 9. Inflation will be 2.5 percent. An inversion of the yield curve is possible. An inverted yield curve encourages creditors to reduce lending because they can no longer make money by borrowing short and lending long. Any contraction in consumer credit reduces the prospects for economic growth. On average, an inverted yield curve leads a recession by 15 months, but an inverted yield curve is not a perfect predictor of recessions. Nonetheless, it is probably as relevant today as in the past. Meanwhile, the Federal Reserve will continue to reverse quantitative easing by further reducing the size of its balance sheet. In summation, monetary policy mistakes are increasingly likely. Due to a stronger dollar, slower foreign economic growth, and trade tensions, exports will grow more slowly in 2019 than in recent years. Because imports will grow faster than exports, net exports will subtract from U.S. GDP growth. The 2019 subtraction will be larger than in 2018. With the economy operating beyond full employment, below-trend levels of foreign immigration will limit U.S. GDP growth in 2019. Multi-family homebuilding starts will trend lower due to delivery of new units already in the pipeline,

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