Citing several economic indicators, one economist told Bloomberg News that the U.S. economy is “close to a peak” this quarter, after ten years of expansion. Recent housing and manufacturing data, as well as trade wars with the country’s largest trading partners, could indicate economic headwinds following the unusually strong quarter. Economists, however, did not foresee a “sudden deceleration,” at least in 2018.
Following a quarter that could reach 4 percent growth, Gregory Daco, head of U.S. macroeconomics at Oxford Economics in New York, expects the momentum to be “cooling” going forward. Daco said looming trade wars with China, Europe and Canada could contribute to the slowdown. The trade risks “come at a point when the economy itself is in the late stage of the business cycle, it’s already close to capacity, where you can’t easily substitute for imports, and businesses are worried about trade tensions,” Daco told the business website.
Other economists pointed to a housing market that is hampered by supply constraints and high property values. Data released earlier this week showed an unexpectedly large drop in construction permits. Manufacturing is also experiencing lengthening order backlogs along with higher prices of oil and metals.
“Manufacturing, while still expanding at a solid pace, has cooled from levels reached in late 2017 and early 2018, according to surveys from the Institute for Supply Management,” said Carl Riccadonna, an economist at Bloomberg. “The gauges reflect a pickup in prices for materials and a jump in order backlogs, which rose last month by the most in 14 years. One bright spot for manufacturers, vehicle production, may also be affected as Trump has threatened to impose automobile tariffs.”
Housing permits have also fallen for a second month. “The pace of permit issuance is much less sensitive to the weather than housing starts, and it usually reflects the pace of new home sales, which we think have now peaked for this cycle,” wrote Ian Shepherdson, chief economist at Pantheon Macroeconomics, following a data release earlier this week on housing permits.
Sales of previously owned homes unexpectedly fell in May for a second month, according to data from the National Association of Realtors.
Federal Reserve Chairman Jerome Powell said on Wednesday there was “strong” case for raising interest rates, while also saying that “in principle, changes in trade policy could cause us to have to question the outlook.”
“Those concerns seem to be rising, for the first time, we’re hearing about decisions to postpone investment, postpone hiring,” Powell said at a European Central Bank forum in Sintra, Portugal.
Atlanta Fed President Raphael Bostic made similar remarks. “I began the year with a decided upside tilt to my risk profile for growth, reflecting business optimism following the passage of tax reform,’’ Bostic said. “That optimism has almost completely faded among my contacts, replaced by concerns about trade policy and tariffs. Perceived uncertainty has risen markedly.’’
There are, however, indicators that the economy remains on solid ground. Retail sales rose in May by the most in six months, accounting for about 70 percent of the economy. The economists expect a slow deceleration in the economy.
Daco said there’s potential for a “more significant shock” from trade policy in 2019 that could contribute to a slowdown in global growth. “The administration may be taking a gamble in saying tariffs won’t have an immediate impact in a strong economy, but that’s just very short-sighted,” Daco told the news service.