US economic growth peaking?
The US economy (SPY) (VTI) grew by an annualized rate of 3.5% in the third quarter as compared to economists’ estimates of 3.4%. With this, the economy looks set to grow by 3.0% in 2018. Consumer spending remains strong, and the labor market remains firm. However, this may be as good as it gets for the US economy at this time. The Federal Reserve is predicting growth to slow to 2.5% next year before slowing down further to 2.0%. The impact of tax reforms by the Trump administration is likely behind the surge in the second and third quarters. From here on, the impact should fade, leading to slower growth.
Business investment slowing
Business investment is already stalling. In the third quarter, business spending declined to just 0.8%, which is its slowest pace since late 2016. This data becomes even more disappointing given the fact that the investments should have ideally risen given the tax cuts implemented by the current administration. The tax windfall doesn’t seem to be making its way to reinvestment. Instead, it is being directed towards direct shareholder returns in the form of dividends and buybacks. Moreover, businesses blamed tariffs over the investment pullback during their latest earnings calls.
Residential investment stalling too
Residential investment (ITB) also slowed for the third straight quarter. New home sales, existing home sales, new housing starts, building permits, and new construction all look lackluster. Higher interest rates (TLT) are eating into the affordability of housing, impacting its demand. Most market participants feel that the best of the housing expansion is now behind us.
In the next part of this series, we’ll look at one of the other major reasons for the uncertainty surrounding the business environment in the US.