U.S. Economy: 3%...Finally...But Peaking

Commerce Trust Investment Policy Team
March 7, 2019

  • The U.S. economy temporarily grew at a 3.1% pace last year, identical to the “real” (inflation-adjusted) rate of 3.1% from 1973 to 2007. But trend growth has fallen and will remain closer to the 2.2% trend post the 2007-2009 financial crisis.

  • The key reasons for this downshift in growth are fourfold:
  • The U.S. private sector paid back some of its debt (deleveraging)
  • Growth of the labor pool slowed (demographics)
  • Global growth fell in concert with U.S. growth (China, Europe, and Japan)
  • An aging society emphasized saving over consumption

  • Temporarily, the deleveraging process has run its course. But monetary policy has just become slightly restrictive, with short-term rates now about 2.5%. Fortunately, tax policy has boosted corporate earnings, fiscal stimulus has kicked in, and household spending began to accelerate last year.

  • Long-term trend economic growth is still just a function of employment growth, investment in capital stock and productivity. With long-term productivity averaging less than 1.5%, and work force growth of 0.5%, economic growth closer to 2% had become the “new” normal.

  • As we came to the end of the deleveraging process last year, we expected economic growth to accelerate, and it did. But last year’s 3% growth rate is unsustainable and will now likely fall back toward trend. The Federal Reserve pushed short-term rates to 2.50% in December, and financial markets tightened considerably in the fourth quarter, clouding the outlook for growth.

  • Still, we do not foresee anything more than a typical late-cycle economic slowdown and believe a recession is still years away.
Disclosures: Past performance is no guarantee of future results, and the opinions and other information in the Current Economic and Financial Conditions Summary are as of January 20, 2019. This is a special report designed to provide investment information on economic markets for Commerce Trust Company’s clients. It is intended to provide general information only and reflects the opinions of the Commerce Trust Company Investment Policy Team. This material is not a recommendation of any particular security, is not based on any particular financial situation or need, and is not intended to replace the advice of a qualified attorney, tax advisor, or investment professional. Diversification does not guarantee a profit or protect against all risk. Commerce Trust does not provide tax advice or legal advice to clients. Consult a tax specialist regarding tax implications related to any product and specific financial situations.
economy at 3%

Source: Bloomberg, Bureau of Economic Analysis