Monthly Economic Review: December 2018

Economy’s foundations remain stable heading into 2019
MER December 2018

As the year ends and the U.S. economy enters its 10th year of expansion, there is considerable momentum heading into 2019. Economic activity during the second and third quarters grew at better than a 3.5 percent pace and appears to have performed solidly through the fourth quarter. The full year is expected to come in at approximately 3 percent annualized growth, making 2018 one of the best years of this expansion. We feel confident that the expansion will remain intact in 2019 and record the longest economic upswing on record.   

As part of that expansion, consumer spending has grown steadily. Retail sales for the first 11 months of 2018 were up 4.7 percent over the same period a year earlier and remained in line with NRF’s forecast of at least 4.5 percent for the full year.

It is, however, a very complicated economic environment. 2018 has been a good year with economic activity supported by strong job growth, wage increases, relatively tame inflation and household net worth climbing to new heights. Tax reform that took effect in January enhanced consumer income and supported the strong growth in consumer spending and retail sales. Ramped-up government spending has also contributed to stronger economic growth. Yet several factors will have run their course and begin to fade going into 2019. The impact of the income tax cuts will dissipate and modulate personal consumption spending. Higher interest rates associated with Federal Reserve monetary tightening have weighed on the pace of the housing market. Uncertainty has increased as higher global tariffs and the possibility of more to come have created turbulence in financial markets.

Consequently, it is reasonable to expect a slower pace for the economy in 2019, but that does not mean negative numbers. The speedometer is registering that the pace of economic growth seen in the second and third quarters of this year is not likely to materialize in 2019. But U.S. economic data is far from showing any red lights on the dashboard to signal that a recession is around the corner. In fact, the two early-warning statistical measures updated weekly by the Federal Reserve Bank of Chicago (the National Financial Conditions Index, or “blue line”) and the Federal Reserve Bank of St. Louis (the Financial Stress Index, or “red line”) indicate that stress in the U.S. financial system is below average for both measures (see chart below). Past recessionary periods have correlated with rising index values, but neither index currently indicates that the U.S. economy is in a recession, and neither is exhibiting any significant upward trends that would point to a pending recession.

Retail sales accelerated in November, increasing 0.7 percent over October on a seasonally adjusted basis, and 5 percent year over year unadjusted. Sales were up 4.3 percent on a three-month moving average compared with the same period a year ago and signaled a potentially strong contribution to the final calculation of fourth-quarter gross domestic product. The pace of job creation has been solid and unemployment rates are the lowest they have been in almost 50 years. Most important for the year ahead will be ongoing strength in the job market that will boost consumer income and spending, both key drivers of the economy. Recent income and consumption data remain strong as households entered the holiday season and were consistent with NRF’s holiday forecast of up to 4.8 percent growth over 2017.

Download this month's report, which includes the following charts and highlights:

  • Consumer sentiment
  • Real final sales
  • Job openings and hires
  • Private payrolls
  • Consumer price index
  • Retail sales
  • Consumer debt
  • Financial stress