The 2019 Economic Outlook
In 2018, the American economy has grown for the ninth consecutive year, making the current upturn the second longest on record. Despite the upturn’s advanced age, rising tariffs and rising interest rates, we can expect growth to continue in 2019 at approximately this year’s pace.
Acceleration and Rejuvenation
One reason for this growth is the economy’s recent acceleration. What’s behind the acceleration is another. During the first half of 2018, gross domestic product (GDP) grew 2.7% — well above the 2.0% gain for the same period a year earlier, and the fastest for any six-month duration in three years. Consumer spending continued to grow at a decent 2.5% pace. And federal spending increased 2.1% compared to 0.7% for all of 2017. The factor primarily contributing to the difference, however, has been business investments in equipment and software, which is up 8.7%, or more than double the 3.7% gain one year-ago.
Capital investment rejuvenates the economy. The productivity gains it fosters initiate a virtuous economic cycle by supporting non-inflationary wage growth. This increases consumer and business spending, which stimulates another round of capital investment to meet the growing demand for goods and services. Equally important, it takes innovation — the genesis of economic advancement — from the theoretical to the practical. Consumer spending gets most of the attention because it accounts for nearly 70% of GDP. But even the consumer can’t take the economy very far without productivity-enhancing, technology-enabling capital investment.
The economy’s strength has given our industry a boost. Recent SGIA research estimates that the commercial printing segment’s sales (all sources, not just printing) increased 1.5% during the first half of 2018 to $86.1 billion — 10.8% greater than the 2011 low. Nearly 60% of the companies surveyed report that their sales are higher than a year ago. Furthermore, 45.8% expect business conditions to be better during the second half of 2018 than they were during the first half, while just 14.7% expect the opposite. (Profitability is another story: Just 35.8% of our research panel are more profitable than a year ago as rising paper costs, wages/salaries and health care benefits pressure margins.)
When examining threats to the economy’s advancement, none are greater than using tariffs as a tool of international brinksmanship. A tariff is the economic equivalent of a tax, raising the cost of its targets, affecting resource allocation and creating unintended consequences. One participant in SGIA’s economic research explained that tariffs on Canadian newsprint have “blown up our web press operations! [This] could cost us customers and reduce new business due to rapid rise in costs. Awful!”
In addition, consider the experience of Standard Textile, as reported in the August 8, 2018, edition of The Wall Street Journal. Since 2002 the Cincinnati-based manufacturer of towels, blankets, sheets and comparable products has invested more than $60 million in two American manufacturing plants, creating approximately 400 jobs. Production requires the raw material greige, much of which Standard Textile imports from China. The new tariff regime raises rates on greige from 6.7% to 25%, but finished textiles manufactured in China continue to pay 6.7%. Comparable distortions are playing out across the economy.
Moreover, raising tariffs increases incentives to file for exemptions, just as raising taxes increases incentives to exploit loopholes. Nearly 21,000 applications have been filed for exemption from steel and aluminum tariffs alone. The process is extraordinarily complex, absorbing resources that could have been better used increasing production efficiencies, investigating customer needs or doing practically anything else.
Although the dollar value of the products subject to increased tariffs is a fraction of the global economy, what’s small in measure can have outsized effects in our economically integrated world. Remember, subprime mortgages were a fraction of the mortgage market and look what they did.
Tariffs don’t have to instigate a full-blown trade war to damage the economy. The uncertainty they introduce — “Is one of my products or essential materials next?” — causes the reevaluation of investment and hiring decisions.
No one knows where the brinksmanship will lead; maybe it will correct unfair practices and lead to greater and fairer trade. Rather than assume it will or dismiss it altogether, we will need to watch carefully.
Let’s also watch inflation carefully. It’s still moderate at the consumer level: The personal consumption expenditure price deflator rose 2.2% through mid-2018, in line with the Federal Reserve’s 2% target. But a look earlier in the production chain shows prices are up 5.4% for industrial commodities, 4.1% for transportation services and 5.5% for warehouse/storage services. All that will work its way through to retail, forcing the Fed to change the objective of interest rate hikes from normalizing rates to slowing the economy.
Then there are all the consequences of ending nearly 10 years of extraordinarily low interest rates. For one thing, servicing the national debt, now $21.3 trillion, will be more costly. Net annual interest payments already exceed $310 billion, nearly half the $636 billion the federal government spends on all non-entitlement programs (Social Security, Medicare, etc.) and the $634 billion spent on defense. How will substantial increases in financing costs affect the economy? How will it affect spending priorities?
Also, as interest rates rise, the American dollar will appreciate further, particularly against the currencies of less economically-developed countries. The appreciation will make it more difficult for those countries to service their dollar-denominated debt. Can they keep up? If not, how will the banks that issued the debt be affected? Will the effects be contained or transmitted and magnified across our integrated global economy? And how much will an appreciating dollar dampen U.S. exports?
We will eventually have to deal with those questions — and many more like them.
Here’s What We Know Heading Into 2019
It takes a while for changes in interest rates to affect the economy. So even if the Fed has to tighten more aggressively than planned, the economy is not likely to slow appreciably in response until the second half of 2019, at the earliest.
The economy has a shot at getting back on the 3%-plus growth path it followed prior to the Great Recession. There are always forces pulling the economy up and down. The relative strength of the two is what matters. As with capital investment, labor market conditions, consumer confidence and business confidence all indicate that those forces pulling up are stronger. This year, the economy will have grown close to 3%. Next year, growth could again approach 3%. During the quarter century prior to the Great Recession, GDP grew an average of 3.4% per year. In the nine years since the recession’s end, growth has averaged just 2.2% per annum.
The Next Revolution
Finally, it isn’t just the economy. Our industry is being transformed by history’s third great economic revolution. Call it the Digital Revolution, the Information Revolution or anything you want. By any name it is redefining our clients, competition, services, labor force, value proposition and everything else that matters. It exempts no one. As evidence, consider that the average lifespan of an S&P 500 company has declined by 78%, from 67 years in the 1950s to just 15 years today.
And there is no waiting it out: We are moving rapidly into the fourth great revolution, to be led by artificial intelligence, robotics, the internet of things and 3D/additive printing.
We win the revolution by building a sustainable competitive advantage. We build the advantage through actions, such as reading weak signals, building our employer brand and communicating change effectively. You’ll find such actions in every SGIA economics report. You’ll also find meaningful analysis of the economy and trends — whether economic, technological, social or demographic — that will define our industry’s future.
We conduct and share these reports with one goal in mind: Keeping you ahead of it all — because that’s the place to be.
Economy Resource Constraints in 2019
The issue for 2019 is how close the economy will come to its resource constraints. Shortages of skilled personnel and essential materials create inefficiencies, diminish productivity and profitability, and weaken the virtuous cycle mentioned earlier. The following will give us a lead on whether that’s happening:
The Index of Unit Labor Costs, U.S. Bureau of Labor Statistics (bls.gov) tracks the relationship between employment costs and productivity. If the index is rising, compensation is running ahead of productivity. If corporations have pricing power, they can pass at least some of the difference along, goosing inflation. If they don’t, profits take a hit. Either result says something important about the economy’s prospects.
The Producer Price Indexes, U.S. Bureau of Labor Statistics, for commodities, raw materials, transportation, warehousing, etc., to get a read on where inflation is headed.
The Personal Consumption Expenditure Price Deflator, U.S. Bureau of Economic Analysis (bea.gov) indicates how much of the inflation at the producer level is making its way to the consumer level.
No indicator is perfect, so the Conference Board Leading Economic Index for the United States (conferenceboard.org) combines 10 into a powerful index of leading indicators. Among the indicators are initial claims for unemployment insurance, Leading Credit Index and consumer expectations for business conditions.
Andrew D. Paparozzi joined SGIA as Chief Economist in 2018. He analyzes and reports on economic, technological, social and demographic trends that will define the printing industry’s future. His most important responsibility, however, is being an observer of the industry by listening to the issues and concerns of company owners, executives and managers.
Previously, he worked 31 years at the National Association for Printing Leadership. He has also taught mathematics, statistics and economics at various colleges.
Andrew holds a Bachelor’s degree in economics f rom Boston College and a Master’s degree in economics — with concentrations in econometrics and public finance — from Columbia University.