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Fading Tailwinds Will Limit U.S. Economic Growth in 2019, Says MBA’s Chief Economist

Michael Fratantoni, chief economist with the Mortgage Bankers Association, speaks to the crowd at the opening day of the 2019 Commercial Real Estate Finance/Multifamily Housing Convention & Expo at the Manchester Grand Hyatt San Diego. Sitting is Jamie Woodwell, MBA’s vice president of research and economics. (Image courtesy of Twitter)

SAN DIEGO — Despite a strong U.S. job market, GDP growth will slow now that the tailwind from the Tax Cuts and Jobs Act has largely dissipated, predicts Michael Fratantoni, chief economist with the Mortgage Bankers Association (MBA).

More specifically, Fratantoni is forecasting the nation’s economy to grow 2 percent in 2019, down from 3.1 percent in 2018.

Passage of the sweeping tax bill in late 2017 and signed into law by President Donald Trump “led to some front-loading of some additional spending and benefits, particularly on the corporate tax side that showed up as this faster growth rate in 2018,” explains Fratantoni. “We also know that the budget agreement that was reached [early last year] really concentrated about $300 billion of spending particularly in 2018, maybe a little bit into 2019.”

The comments from the veteran economist came during a special session Sunday on the opening day of the 2019 Commercial Real Estate Finance/Multifamily Housing Convention & Expo at the Manchester Grand Hyatt San Diego.  Jaime Woodwell, vice president of commercial/multifamily  research for MBA, also provided an update on the state of the commercial/multifamily market during the session. The-four day conference has attracted mortgage bankers from across the country.

One of the most troubling headwinds is the slowdown in economic growth globally, points out Fratantoni. The International Monetary Fund (IMF) predicts annual GDP growth of 3.5 percent worldwide in 2019, down from 3.7 percent last year and 3.8 percent in 2017. What’s particularly noteworthy is that China’s annual GDP tailed off from 6.9 percent in 2017 to 6.6 percent last year and is projected to be 6.2 percent this year.

“China is slowing and there is real skepticism as to whether these numbers actually reflect what’s going on there. The slowdown is probably worse than what we’re showing,” says Fratantoni.

India is one bright spot economically on the world stage. After recording GDP growth of 6.7 percent in 2017, the country’s economy grew 7.3 percent in 2018 and is projected by the IMF to grow 7.5 percent this year.

Falloff in trade

Compounding the problem is that the pace of trade growth globally has also slowed from 5.3 percent in 2017 to 4 percent last year and is expected to be 4 percent again this year.

‘This is not a good story,” points out Fratantoni, “and the question is will the U.S. markets be able to plow ahead even if global markets are slowing?”

The U.S. trade deficit with China has continued to grow, even with the highly publicized tariffs placed on Chinese imports. The trade deficit with China totaled $376 billion in 2017 and rose to an estimated $413 billion in 2018.

“With the imposition of tariffs, yes we may be importing less, but we’re exporting a whole lot less,” says Fratantoni.

Net foreign direct investment in the United States from China has fallen to near zero over the past few quarters, according to the Peterson Institute for International Economics. While Fratantoni recognizes that the pullback by Chinese investors is partly the result of a slowdown in their economy, he believes the tensions over tariffs have also played a factor.

Jobs picture is bright

On the labor front, Fratantoni is forecasting the nation’s unemployment rate to average 3.7 percent in 2019, down from an average of 3.9 percent in 2018. “That’s close to a 50-year low. If you get much below that you have to look back to the 1950s to see a job market that looks like we’re seeing today.”

Source: MBA Forecast

One of the unique aspects of the current economic expansion is that inflation has largely been held in check. Fratantoni is forecasting the inflation rate to be 2.1 percent in 2019 versus 2.4 percent in 2018. The bottom line is that businesses are less likely, and less willing, to pass on higher costs to customers, he says.

What’s the Fed’s next move?

The current federal funds rate is 2.5 percent, following a quarter-point hike in December 2018. But the Federal Reserve appears to have backed away from signaling that it will implement a series of rate hikes in 2019.

There’s been a dramatic change in the stance of the Federal Open Market Committee (FOMC) on this issue, acknowledges Fratantoni. “For a long time, a key line on the FOMC statement was that they were prepared to move gradually to raise rates until [reaching] a neutral rate. A neutral rate is one not low enough to stimulate the economy, but one not high enough to actively slow it down. They changed their tune.”

Concerns over a slowdown in economic growth globally combined with a high level of volatility in the stock market during December led to the Fed getting some blowback from the business community, says Fratantoni.

“Investors were crying out the only way they could, saying ‘it’s beginning to hurt. The level of short-term rates, the speed at which you’ve increased them, is beginning to have a notable impact on growth.’”

The Fed apparently got the message, according to Fratantoni. “They no longer have a path drawn out in terms of where they expect to take short-term rates. They may already be at neutral. And you can imagine an economic scenario where the next move is a cut. It’s unlikely that’s what it is.”

Fratantoni and his team are betting there is going to be one more hike in the federal funds rate in the current cycle, probably later this year. “But it’s possible this could be it, that for short-term rates this is as high as it is going to get.”

— Matt Valley

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