Recently, with slower economic growth globally, some financial markets across the world have waned and shown volatility, largely on the belief that this global cooldown might be a harbinger of a possible recession. Based on my analysis, while business leaders have grappled with a number of uncertainties of late, I believe the American economy—and the manufacturing sector—is still poised to continue growing into 2019 and beyond.
Yes, yields have moved lower as a result of the economy softening—especially in Europe and China—but central banks have also tried to quell drastic concerns and have stressed patience. In the United States, for instance, the Federal Reserve has done a complete turnaround since December in its stance toward monetary policy, shifting from the likelihood of two to three rate hikes in 2019 to the more dovish view of possibly no rate increases this year, with some analysts even pushing for rate cuts.
This has led to a lot of volatility in yield curves in recent days. Some of these curves, such as the spread between the 10-year bond and the federal funds rate, have inverted, raising worries about the risk of recession. Yet, it is important to keep things in perspective. The more-important yield curve—the spread between the 10-year and 2-year bond yields—has not inverted. Since World War II, the U.S. economy has entered a recession only if this yield curve goes negative, occurring within 12 to 18 months of inverting.
As far as inversion is concerned, the 10-year Treasury yield has drifted sharply lower over the past few weeks, down from 2.76 percent on March 1 to 2.39 percent yesterday, the lowest point since December 2017. But other rates have also drifted lower—and the current spread between 10-year and 2-year bonds is 0.17 percent. In addition, the Federal Reserve has said it does not intend to invert the yield curve, and it is not expected to raise short-term rates in 2019. Again, my view is that the U.S. economy and manufacturing activity are both slowing but are not expected to decline this year. Indeed, while the risk of a recession is not insignificant, it is also not imminent. I would peg the risk of a recession currently at 20 to 25 percent, rising to 40 percent by 2020.
Yesterday, the Bureau of Economic Analysis revised down real GDP growth in the fourth quarter from 2.6 percent at the annual rate to 2.2 percent. This was largely expected, especially given some of the weaker retail sales and housing data in December. However, it did not change the larger narrative: the U.S. economy grew 2.9 percent in 2018 (and an even better 3.1 percent from the fourth quarter of 2017 to the fourth quarter of 2018). Moreover, economic growth last year registered the best reading since 2005 on a year-over-year basis, largely due to strength in consumer and business spending, but with drags from residential construction and net exports.
Moving forward, I predict 2.4 percent growth for 2019, recognizing that the global economy is in fact softening and there are lingering political uncertainties surrounding trade and other policy areas. There are upside and downside risks in the economic outlook, but the most important takeaway I have is this: I, along with many other economists, expect growth to be positive this year. That point seems to be missed in recent reporting.