Monetary Policy, Trade War Slow Nation’s Economy; But Still Strong

Report Indicates Nation’s Economy Could Slow in the Coming Months

The combined effects of 2018 Tax Cuts and Jobs Act (TCJA), current monetary policy, and a widening trade war will reduce the pace of nation’s economic growth in 2019, says a new report from Ball State University.

“While we expect the pace of U.S. GDP growth to be at or near 3 percent in 2018, we anticipate it slowing to 2.3 percent in 2019,” said Michael Hicks, director of Ball State’s Center for Business and Economic Research and an economics professor.

He also said the national economy is in its ninth year of expansion, with labor markets performing strongly, the unemployment rate is now beneath all common estimates of full employment, and wages have grown over the year of nearly 1.0 percent above the traditional consumer measures.

GDP growth in 2018 was stronger than in 2017, but not historically unusual, even for this relatively slow recovery. Promoting growth in 2018 was the Tax Cuts and Jobs Act, which motivated higher consumer spending, Hick said.

The TCJA lacked a large investment stimulus and resulted in much larger budget deficits, which causally increased the trade deficit through 2018, he said.

“The monetary policy response is the inevitable tightening, which has seen policy and market rate increases throughout 2018,” Hicks said “We anticipate between two and four further rate increases from the Federal Reserve by the end of 2019. The combination of rate increases and a growing trade war are setting the further effects of the TCJA in late 2018 and, as we project, through 2019.”

He also said growing trade disputes have generated the most significant non-conflict risk to international trade since 1930. Current tariff rates and retaliation by trading partners are already damaging the domestic economy.

At current levels, the trade dispute is not sufficient to generate a business cycle but may be large enough to offset the entirety of the Tax Cuts and Jobs Act. Moreover, the effects of a trade war will be felt disproportionately across the country. The Midwest in particular, including Indiana, Ohio, and Wisconsin are among the most trade-exposed states in the union, Hicks said.