The US economy has turned in a stellar performance this year, but mounting problems, from trade tensions to jittery financial markets and political gridlock in Washington, are expected to sharply slow growth next year.
The US Department of Commerce on Friday estimated that the economy grew at a brisk 3.4 percent year-on-year in the third quarter, barely down from an estimate of 3.5 percent that the US government made a month ago. That performance followed a sizzling 4.2 percent annual growth rate in the second quarter.
Analysts have said that they think growth has remained solid in the fourth quarter, with many forecasting annual growth of about 2.5 percent to 2.8 percent.
That would put the economy on track to record growth for all of this year of about 3 percent. It would be the best performance since 2005 and well above the tepid annual growth rates of about 2 percent that have prevailed since the recession officially ended in 2009.
US President Donald Trump has often cited the upturn in growth this year as evidence that his economic program is succeeding. Economists agree that the US$1.5 trillion tax cut that the US Congress passed a year ago, along with the boost in defense and domestic spending approved by Congress in February, helped fuel growth this year.
However, many risks lie ahead. They range from a slowing global economy, disruptions caused by the tit-for-tat trade spat between the US and China, higher borrowing costs for consumers and businesses as the US Federal Reserve raises interest rates to control inflation, and the potential shock to business and consumer confidence shaken from steep declines in stock prices.
Adding to those problems was a new element of uncertainty. A fight between Trump and US Democrats in Congress over providing money for Trump’s proposed wall along the US-Mexico border appeared to be a harbinger of battles ahead as Democrats take control of the US House of Representatives next month.
“We have a dysfunctional government in Washington, and that is just adding to all the uncertainty about the economy,” SS Economics head economist Sung Won Sohn said. “The political fights are coming on top of uncertainty over how the trade fight with China will get resolved and where the Fed goes next with monetary policy.”
The Fed on Wednesday raised its key policy rate for the fourth time this year, but reduced its estimate of the number of rate hikes for next year from three to two.
Still, Fed actions and a news conference by Chairman Jerome Powell failed to ease fears on Wall Street that the central bank might overdo its rate tightening and end up pushing the economy into a recession.
Sohn said he expects growth to slow to about 2.3 percent next year.
“I don’t expect we will have a recession, but there will be a significant slowdown,” he said.
Moody’s Analytics head economist Mark Zandi said he expects growth to slow slightly to 2.7 percent next year, but then he foresees a much sharper slowdown to about 0.9 percent growth in 2020.
“I think the economy will come to a virtual standstill by the spring of 2020,” Zandi said. “The government stimulus in the form of tax cuts and extra spending will have faded by then, and the economy will be struggling with higher interest rates.”