Expect a ‘Decaffeinated’ Economy, but No Recession This Year

As the market fell in the fourth quarter of 2018, a lot of people thought the economy was headed to a recession. David Kelly, chief global strategist for J.P. Morgan Asset Management, was not one of them.

“I don’t think we’re headed for a recession this year,” he said at the Investment & Wealth Institute’s Investment Advisor Forum. “I think there is enough momentum coming off a very strong 2018 to keep us going.”

According to Kelly, U.S. economic growth should slow but not stall in 2019.

Kelly said he has called the American economy a “healthy tortoise” for years.

“It has ambled forward happily, with a smile on its face, growing at 2.3 percent, on average, during this expansion,” he explained.

That was until “something funny” happened last year.

“Last year, the American economy got a huge shot of caffeine,” Kelly said. “Because of this tax cut, [which] was very unusual in the tenth year of an expansion, … we got a huge surge in particularly consumer spending. People say the tax cut was aimed at corporations, but actually it wasn’t.”

According to Kelly, 77 percent of the benefits of the tax cut went to small businesses and individuals, which adds power to consumer spending.

“Consumer spending was very strong in the second quarter, in the third quarter, [and] even into the fourth quarter … and that helped growth accelerate to about 3 percent year over year,” Kelly said.

However, similar to a caffeine or sugar rush, the effects of the tax cut on the economy fade.

“This is just a sugar rush, basically. As you go into this year, consumer spending is slowing down,” Kelly said. “The tax cuts are good, but they raise consumer spending to a higher level but they don’t do further growth thereafter. The tax cuts are in place, so they’re not going to add to growth now.”

This is why Kelly expects that this year the U.S. will have a “decaffeinated economy.”

“Growth of consumer spending is going to slow, growth of investor spending is not that strong, [and] the global economy is slowing down,” he said. “All of these things say that we are going to slow down.”

Originally, Kelly said, he thought the economy would get through the second quarter of this year before the slowdown hit.

“In the second quarter we get one last refill of caffeine, and that is the alternative minimum tax, … which was going to be a big tax cut for select middle- and upper-income households in April,” he explained. “And that was going to help us. And that is [still] going to help us. The problem is the government shutdown itself and the uncertainty caused by the trade war has put such a break in the economy in the first quarter that I think we’re coming in for a soft landing a little earlier than we hoped.”

Kelly emphasized that he thinks the economy can still keep growing.

“Even though the economy is slowing down, it doesn’t mean it’s slowing down to a crawl,” he said. “It doesn’t mean it’s slowing down to a stall; it could just slow down from 3 percent growth to 2 percent growth.”

From: ThinkAdvisor