Q2 Review: Ten Economic Questions for 2019

At the end of last year, I posted
Ten Economic Questions for 2019
. I followed up with a brief
post on each question. The goal was to provide an overview of what
I expected in 2019 (I don’t have a crystal ball, but I think it
helps to outline what I think will happen – and understand – and
change my mind, when the outlook is wrong).

By request, here is a quick Q2 review. I’ve linked to my posts from
the beginning of the year, with a brief excerpt and a few

Question #10 for 2019: Will housing inventory increase or decrease
in 2019?

“I expect to see inventory up again year-over-year in
December 2019.   My reasons for expecting more inventory are 1)
inventory is still historically low (inventory in November 2018
was  the second lowest since 2000), 2) higher mortgage rates, and
3) further negative impact in certain areas from new tax

According to the
May NAR report on existing home sales
, inventory was up 2.7%
year-over-year in May, and the months-of-supply was at 4.3 months.
It is early, and the inventory build has slowed recently as
mortgage rates declined, but I still expect some increase in
inventory this year.

Question #9 for 2019: What will happen with house prices in

“If inventory increases further year-over-year as I
expect by December 2019, it seems likely that price appreciation
will slow to the low single digits – maybe around 3%.”

If is very early, but the
CoreLogic data
for May showed prices up 3.6% year-over-year.
The April
Case-Shiller data
showed prices up 3.5% YoY – and slowing. 
Currently it appears price gains will slow in 2019.

Question #8 for 2019: How much will Residential Investment

“Most analysts are looking for starts and new home
sales to increase to slightly in 2019. For example, the
NAHB is forecasting
a slight increase in starts (to 1.269
million), and no change in home sales in 2019. And
Fannie Mae is forecasting
a slight increase in starts (to 1.265
million), and for new home sales to increase to 619 thousand in

My sense is the weakness in late 2018 will continue into 2019, and
starts will be down year-over-year, but not a huge decline.  My
guess is starts will decrease slightly in 2019 and new home sales
will be close to 600 thousand.”

Through May, starts were down 5.3% year-over-year compared to the
same period in 2018.  New home sales were up 4.0% year-over-year.
  It is early, but it appears starts will be down slightly or flat
this year, and new home sales will be up.

Question #7 for 2019: How much will wages increase in 2019?

“As the labor market continues to tighten, we should
see more wage pressure as companies have to compete for employees.
I expect to see some further increases in both the Average hourly
earning from the CES, and in the Atlanta Fed Wage Tracker. Perhaps
nominal wages will increase close to 3.5% in 2019 according to the

June 2019
, nominal hourly wages were up 3.1% year-over-year. It
is early, but so far wages have disappointed in 2019.

Question #6 for 2019: Will the Fed raise rates in 2019, and if so,
by how much?

“My current guess is just one hike in the 2nd half of
the year.”

It now appears the Fed will cut rates a few times this year.

Question #5 for 2019: Will the core inflation rate rise in 2019?
Will too much inflation be a concern in 2019?

The Fed is
core PCE inflation will increase to 2.0% to 2.1% by
Q4 2019.  There are risks for higher inflation with the labor
market near full employment, however I do think there are
structural reasons for low inflation (demographics, few employment
agreements that lead to wage-price-spiral, etc).

So, although I think core PCE inflation (year-over-year) will
increase in 2019 and be around 2% by Q4 2019 (up from 1.9%), I
think too much inflation will still not be a serious concern in

It is early, but
several measures of inflation are close to the Fed’s
target, however core PCE has been soft.

Question #4 for 2019: What will the unemployment rate be in
December 2019?

Depending on the estimate for the participation rate
and job growth (next question), it appears the unemployment rate
will decline into the mid 3’s by December 2019 from the current
3.7%. My guess is based on the participation rate being mostly
unchanged in 2019, and for decent job growth in 2019, but less than
in 2018 or 2017.

unemployment rate was at 3.7% in June

Question #3 for 2019: Will job creation in 2019 be as strong as in

So my forecast is for gains of around 133,000 to
167,000 payroll jobs per month in 2019 (about 1.6 million to 2.0
million year-over-year) .  This would be the fewest job gains
since 2010, but another solid year for employment gains given
current demographics.

Through June 2019, the economy has added 1,033,000 thousand jobs,
or 172,000 per month. This is slightly above my forecast, and it
appears job growth will slow this year compared to 2018.

Question #2 for 2019: How much will the economy grow in

“Looking to 2019, fiscal policy will still be a
positive for growth – although the boost will fade over the course
of the year, and become a drag in 2020.   And oil prices declined
sharply in late 2018, and this will be a drag on economic growth in
2019.   Auto sales are mostly moving sideways, and housing has
been under pressure due to higher mortgage rates and the new tax

These factors suggest growth will slow in 2019, probably to the low
2s -and maybe even a 1 handle.”

growth was solid in Q1 at 3.1%
, although the underlying details
were weaker than the headline number. Forecasts for Q2 are around
1.5%. Last year I was forecasting a pickup in growth – and that
happened – and this year I expect growth to slow.

Question #1 for 2019: Will Mr. Trump negatively impact the economy
in 2019?

My forecasts are based on a limited negative impact
from Mr. Trump – and I hope that remains the case.   But he is a
key downside risk for the economy.

This week,
Fed Chair Powell highlighted trade and immigration policies
headwinds for the economy. It appears the administration’s policies
are starting to negatively impact the economy.

The Fed will probably lower rates this year, and it appears new
home sales might be higher than I originally expected, and
inflation is lower than I expected.
Source: FS – All – Real Estate News 2
Q2 Review: Ten Economic Questions for 2019