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Will the U.S. Economy Weaken in 2019?

IESE’s U.S. Advisory Council considers fiscal reforms and growth prospects

March 16, 2018

While the world is expected to enjoy another year of robust economic health during 2018, the U.S. may begin to show signs of weakness during 2019, despite landmark new tax reforms.

That was the prediction of members of IESE’s U.S. Advisory Council who spoke to MBA students on the Barcelona campus, where they are attending their annual meeting. The council is composed of business and public-sector leaders based in the U.S., and advises and supports the school in its activities there.

The consensus was that 2018 will be a generally positive year for the global economy. But things may get trickier in 2019 – especially in the U.S.

“Global growth is strong and robust” at the moment, said Fritz Folts of 3Edge Asset Management. “But I would think it’s possible that at some time during 2019 the U.S. economy will turn.”

Fiscal Plan’s Mixed Impact on Companies

That despite December’s historic tax legislation, aimed at energizing the U.S. economy. The speakers said that while the fiscal overhaul may be prompting many large U.S. corporations to repatriate funds, questions remain on how that money will be spent.

One of the biggest questions is whether companies will use the funds for stock buy-backs – a move which is tempting and generally rewarded by the markets – or whether they will make the sort of long-term capital expenditures that don’t produce immediate returns.

Jay Ireland, president and CEO of GE Africa, noted that having greater flexibility to move capital is a plus, but is unlikely to fundamentally alter the company’s long-term investment strategies. GE’s investments in the U.S. tend to focus on next-generation technologies, while its spending on factories and manufacturing tends to be in the developing world. That won’t change, he said.

What would change the company’s outlook is if protectionist rhetoric in the U.S. and other countries escalates into trade barriers or trade wars. “We’re truly a global company and if we had to depend only on the U.S. market, we wouldn’t have the growth,” Ireland said.

Focus on Interest Rates, Regulations

Beyond the fiscal situation, the business leaders are looking at factors such as interest rates, inflation and financial sector regulations. The extended economic expansion of recent years may be nearing the end of its cycle, they say.

Claire Huang, an independent board director and former chief marketing officer at JPMorgan Chase, welcomes a rollback in regulations governing the financial sector. “The great thing that’s happening right now is that some of the regulations that were put into place in the Great Recession are being pulled back,” she said. “Now that they’re easing up on the regulatory environment, it’s a huge difference.”

But many economists forecast an end to the era of quantitative easing of interest rates. That will have a particular impact on debt-burdened individuals and companies in the U.S., contributing to a potential slowdown in growth.

And even before that, capital markets are likely in for greater volatility this year, after posting month-on-month gains every month of 2017. “In terms of the capital markets there’s going to be volatility going forward as some of that liquidity gets extracted,” said Folts.