The US economy is expected to slow in 2019 and 2020, even though growth was particularly strong in Q2 and Q3 of 2018. Moreover, there is little doubt that the Trump’s increasing trade war with China, and his tariffs on steel and aluminum, have started to affect the macro statistics.

Based on advanced estimates, America’s real GDP increased at an annualized rate of 3.5% in the third quarter, while the price deflator increased at a lower-than-expected 1.7% annual rate. Since real GDP expanded at an even faster 4.2% in the second quarter, the US economy has recently experienced the two strongest consecutive quarters of growth since 2014.

Examining the key components of the national accounts, consumer spending accelerated at a 4% annual rate in Q3, business investment stalled at less than a 1% growth rate, residential construction contracted at a 4% rate, while inventory accumulation and imports both soared. As a result, net exports subtracted 1.78 percentage points from third quarter GDP growth while inventory accumulation added 2.07 percentage points to growth in the quarter.

The robust performance of the economy in the last two quarters underscores that the role that the strong job market and lower taxes have played to boost consumer and corporate spending. The robust economy also provided President Donald Trump with an opportunity to showcase his policies in advance of the mid-term Congressional elections. At the same time, tariff-related bottlenecks and the trade war with China, which could create headwinds for the economy, have not yet shown up negatively in the macro economic statistics. However, there have been some distortion effects in the data because of trade concerns.

GDP growth is expected to moderate in 2019 as the effects of the tax cuts begin to wane, and the negative impacts of the tariffs, a strong dollar, and higher interest rates weigh on the economy. As for inflation indicators, despite two quarters of strong growth, the GDP price deflator reported inflation running at a 1.6% annual rate in Q3, substantially below the Fed’s 2% goal. The S&P 500 Index dropped more than 7% in October, but the recent sharp decline in equity prices has not changed expectations that the Fed will raise interest rates in December for a fourth time this year.