Despite trade wars, continued energy volatility, and a looming housing crisis, the United States economy is looking quite good. In fact, the U.S. economy currently looks good enough that the Federal Reserve is likely to keep increasing interest rates through 2019.
With many claiming that the stock market is about to crash and the economy is about to tighten, what is making the Feds so optimistic?
The U.S. Economy Continues to Grow
Rate hikes occur when the economy is doing well. When the economy is doing poorly — such as during a recession or depression — rates are slashed to virtually nothing. Low rates encourage spending and reinvestment. When the economy is doing well, rates are raised so that households don’t take on an excessive amount of debt.
Rates are being hiked currently because the economy has been growing. Though there have been many fears about the economy throughout 2018, many of them have proven to be unfounded when economists looked at the actual numbers. For example, the economy has added hundreds of thousands of jobs, and has grown between 3.5% and 4.2% from quarter to quarter.
And while major indicators are present for a stock market crash, the market has not yet crashed. While it shows increased signs of volatility, it’s still remained on a largely upward trend. In part, this could be because of solid economic performance throughout the United States, which ultimately serves to bolster investor confidence.
None of this is to say that the economy won’t slow down in the coming year — only that an economic slow down is substantially different from a crash. It’s likely that businesses are going to pull back on their own spending in 2019, both as a response to economic pressures and a response to increasing interest rates and the cost of lending. This reduction in business spending is likely to have some economic impact and economic growth may begin to stagnate.
Some Negatives Still Remain
Not everything about the 2019 economy is looking good; there are a few weak spots that investors may want to keep in mind. It’s these weak spots that are likely to slow down growth even though it may not be able to completely mitigate the current status of the U.S. economy. Let’s look at a few of the more obvious examples:
Housing: The housing market is likely to slow down through 2019. With lending no longer as affordable as it once was, home purchasing may slow down and home price inflation may begin to creep. However, a slow down doesn’t mean a crash; it’s likely values will at least remain stable.
China: Chinese tariffs have been unpredictable thus far, with many industries unaware of how it will really impact them. While products such as soybeans have been severely impacted, other industries haven’t seen the widespread destruction they at first expected. Nevertheless, industries directly impacted by the tariffs are likely to experience a recession.
Energy: Energy is consistently a volatile investment, and the crude oil market has continued to be volatile through 2018. With increasing investments in oil and natural gas, the volatility of energy costs becomes a major player in the 2019 economy.
Markets: Market analysis has been negative for some time, indicating that a crash is on the horizon. If a crash does occur, it’s likely that there will be some severe economic pullback. Yet stocks are continuing to rise despite many analysts believing that the time is right for a crash — and no one can guarantee when a crash might occur.
While it’s likely that growth isn’t going to be tremendous in 2019, the economic forecast so far appears to be relatively stable. Apart from a few economic issues — such as the housing market and trade wars — the country itself appears to be strong and ready for further investment. Investors should pay attention to the major pain points of the U.S. economy, but shouldn’t worry overly about a dramatic recession.