The economy, as measured by gross domestic product (GDP), grew at 4.2% in the second quarter. It slowed to 3.5% in the third quarter. Meanwhile, Q4 projections have been coming in closer to 2.9%.
An optimistic “take” would be to exclaim that the 2% pace that has been the hallmark of the current expansion is now in the rear-view mirror. For 2018 and beyond, we have kicked it into a higher gear (3%) due to tax cuts and regulation curtailment.
A less rosy perspective? Economic growth has peaked.
Keep in mind, the U.S. economy required $3.5 trillion in Federal Reserve bond-buying stimulus and $9.8 trillion in new government debt to maintain the “New Normal” (2%) from 2009-2017. Tax cuts financed by $1 trillion plus in new debt in 2018, coupled with a Fed that has yet to reduce its balance sheet meaningfully ($4.1 trillion), has taken us to a 3% annual average temporarily. Going forward? Federal Reserve balance sheet reduction combined with tighter rate policy will slow the economic growth train.
In the recent past, economic contraction around the globe (Q3 2015 – Q1 2016) nearly brought the U.S. to its knees. The Bank of Japan and the European Central Bank provided shock-n-awe levels of bond buying with electronic currency credits. The U.S. Fed slashed plans for four rate hikes down to a token hike slated for the end of 2016. And the U.S. economy averted recessionary pressure.
In a similar vein, the economy began slowing once again as the presidential election year wore on. Then, the game-changing promise of less regulation and lower taxes gave a jolt to business confidence. Asset prices that had been laboring for nearly 22 months also moved skyward.
More recently, financial markets have been signaling a slowdown — one that is largely associated with higher borrowing costs. Is it any wonder that two stock market corrections in 2018 came about when the 10-year yield catapulted 50 basis points in a span of 4-6 weeks?
