It can be tempting to presume that all is right with the economy. Economists and others certainly have plenty of data with which to support the notion that the proverbial glass is nearly full.
For example, in 2017, a synchronized global expansion blossomed as every major advanced economy experienced accelerating economic growth except for Brexit-beleaguered Britain and as key emerging nations like Brazil and Russia returned to the growth column.
Helped in part by a stronger global economy—by late summer 2018—the U.S. recorded an unprecedented tally of available job openings at 7.14 million. Given that there are only six million unemployed Americans, this suggests that at least theoretically there is a job for everyone looking for one.
By September, the nation’s unemployment rate had achieved nearly a 50-year low. One would have to go back to December 1969 to identify an unemployment rate so low. Predictably, with low unemployment colliding with an incredible volume of available job openings, wages are being tugged higher. Though real wage growth remains soft given rising inflationary pressures, nominal wage growth is about as good as it has been in a decade.
Job growth has been apparent in every large U.S. metropolitan area, with the pace of job growth tending to be fastest in the South and West. Markets like Orlando, Dallas, Denver, Charlotte, Seattle, Houston, Atlanta, Portland (Oregon), and Phoenix have been especially prolific concerning expanding their base of employment. However, job growth has also been apparent in markets like Boston, Baltimore, Minneapolis, and in other parts of the U.S. Unemployment is low virtually everywhere, including in Maryland where it has lingered in the low-fours for months and in Virginia, where it recently fell below 3 percent.
Then there is the matter of the passage of the Tax Cuts and Jobs Act, the first meaningful reform of the nation’s tax code since 1986. The Act restructured income brackets, reduced personal income taxes for many Americans, shrank the C-corporation tax rate to 21 percent, and made it easier to repatriate profits earned abroad. The new law also increased the amount a company can immediately expense for certain types of purchases. During the first half of 2018, this supported brisk growth in capital expenditures, which in turn has helped push U.S. economic growth from the roughly two percent rate that characterized much of the expansion to around three percent.
Silver Linings Become Grey Clouds
Make no mistake—there is little risk of a near-term recession. Consumer confidence remains elevated and a variety of leading indicators suggesting ongoing momentum. But the gloss has begun to come off the recovery’s rose. Arguably, this begins with shifting policies. While much attention has been given to tariffs and ongoing trade skirmishes between the U.S. and a variety of other societies, most notably China, less glaring focus has been invested in steadily tightening monetary policy, which has translated into rising interest rates. The combination of higher borrowing costs, rising wage pressures, higher costs of steel, softwood lumber, and other inputs to production have resulted in sputtering corporate profits, which helps explain the rocky financial market performance that characterized much of October.
There have been other headwinds to emerge, including faltering emerging market currencies, the murder of a Washington Post journalist that threw further chaos into energy markets, and growing evidence of a housing market slowdown. Add it all up, and the 2019 economic outlook looks meaningfully shakier than it did just a few months ago.
Moreover, while many have praised the tax cuts, the total impacts remain unclear. By the third quarter, there was evidence that tax cut impacts were on the wane, with business spending suddenly softening. There are also instances in which the tax reform frustrates economic activity. For example, the tax bill placed a cap of $10,000 on state and local tax deductions. Wealthy states that put a higher tax burden on their citizens in exchange for large-scale spending on public education and other services bear the brunt of the tax change.
Since Maryland is one of the nation’s wealthiest and also most highly taxed states, this is especially impactful. An article posted in HousingWire, a website focused on U.S. mortgage and housing markets, quoted Maryland Attorney General Brian Frosh as saying, “Eliminating [state and local tax] deductions will jack up taxes for more than half a million Marylanders. Those Marylanders affected by the changes from the new tax bill are expected to lose up to $6.5 million in deductions.”
Arguably, the most worrisome aspect of the economy takes the form of rising inflationary pressures. Economists deploy a term called the natural rate of unemployment. When unemployment falls below that natural rate, inflation tends to spike, producing sharp increases in borrowing costs and softer investment. At 3.7 percent, the official rate of U.S. unemployment is now meaningfully below that natural rate of unemployment. This set of circumstances prevailed before the 1980–81 recession, the ’90–91 recession, the 2001 recession, the 2007–09 recession, and now. Thus, while the early-2019 economic outlook remains benign given existing economic momentum and still lofty confidence among consumers and businesses alike, the outlook beyond next year’s first half is suddenly steeped in murkiness.
