Fed says U.S. economy ended 2018 with solid but weakening growth

FILE PHOTO: Flags fly over the Federal Reserve Headquarters on a windy day in Washington, U.S., May 26, 2017. REUTERS/Kevin Lamarque/File Photo/File Photo

By Howard Schneider and Pete Schroeder

WASHINGTON, Feb 22 (Reuters) – The U.S. economy maintained “solid” growth through the second half of 2018, likely expanding “just under” 3 percent for the year, though consumer and business spending had begun to weaken, the Federal Reserve said on Friday in its semi-annual monetary policy report to Congress.

In a document that balanced its mostly positive outlook for a still growing economy against an array of emerging domestic and global risks, the U.S. central bank laid out why it had put further interest rate hikes on hold last month.

From a “deteriorated” appetite for risk among investors to a slowdown in China, the outlook for policy is “more uncertain than earlier,” the Fed said, noting “softer global and economic conditions.”

That may spill into the start of 2019, the Fed said, noting that the recent 35-day partial shutdown of the U.S. government “likely held down GDP growth in the first quarter of this year.”

For 2018, the Fed said: “Consumer spending expanded at a strong rate for most of the second half … though spending appears to have weakened toward year-end.”

“Business investment grew as well, though growth seems to have slowed somewhat,” it added.

Consumer and business confidence remains “favorable,” but “some measures have softened since the fall,” the Fed reported. “Domestic financial conditions for businesses and households have become less supportive of economic growth.”

The Fed noted to Congress that it would continue to reduce the size of its balance sheet, which had declined by about $260 billion since its last report to lawmakers, ending the year at close to $4 trillion. But the central bank also repeated its new openness to adjusting “any of the details” of its balance sheet plan if economic and financial conditions warrant.


Fed Chairman Jerome Powell will testify before lawmakers in the U.S. Senate and House of Representatives on Tuesday and Wednesday to elaborate on the report in what could prove to be an important week for economic data and the central bank’s sense of where the economy is heading.

The report indicated some underlying economic strength, with “ongoing improvements in the labor market,” and solid growth in disposable income, fueled by the Trump administration’s tax cuts, boosting household consumption.

Inflation last year remained close to the Fed’s 2 percent target.

But the Fed noted headwinds, including those tied to the ongoing debate over global trade policy. Overall, net exports “likely subtracted a little from real GDP growth” over 2018, despite the administration’s efforts to improve the U.S. trade position.

At a policy meeting late last month, Fed officials put their three-year push for higher interest rates on hold amid a broad recognition that inflation and global growth had weakened, and that the U.S. outlook was less certain than just a few weeks earlier.

Since then, economic data has been mixed, with weaker retail sales and manufacturing reports balanced by continued strong job growth.

But some important pieces of the puzzle have been missing altogether. Most notably, the report on gross domestic product for the last quarter of 2018 was delayed by the recent government shutdown.

That report is due to be released on Thursday, and will be followed on Friday by the jobs report for February.

(Reporting by Howard Schneider and Pete Schroeder Editing by Paul Simao) ((howard.schneider@thomsonreuters.com; +1 202 789 8010;))

Migration, climate top World Economic Forum’s report on global risks

LONDON (Reuters) – We live in an increasingly dangerous world, with political, economic and environmental threats piling up, according to experts polled by the World Economic Forum.

Ahead of its annual meeting in Davos next week, the group’s 2016 Global Risks report on Thursday ranked the migrant crisis as the biggest single risk in terms of likelihood, while climate change was seen as having the greatest potential impact.

Around 60 million people have been displaced by conflicts from Syria to South Sudan, pushing refugee flows to record levels that are some 50 percent higher than during World War II.

Coupled with attacks such as those on Paris last year and geopolitical fault lines stretching from the Middle East to the South China Sea, the world is today arguably less politically stable than at any time since the end of the Cold War.

Economic fears, particularly for Chinese growth, and increasingly frequent extreme weather events are further red flags, resulting in a greater breadth of risks than at any time in the survey’s 11-year history.

“Almost every risk is now up over the last couple of years and it paints an overall environment of unrest,” said John Drzik, head of global risk at insurance broker Marsh, who helped compile the report.

“Economic risks have come back reasonably strongly, with China, energy prices and asset bubbles all seen as significant problems in many countries.”

Last year, the threat of conflict between states topped the list of risks for the first time, after previous editions mostly highlighted economic threats.

British finance minister George Osborne, one of those heading to the Alpine ski resort set the mood last week, warning that 2016 opened “with a dangerous cocktail of new threats”.

The Jan. 20-23 Davos meeting will bring together players from geopolitical hot spots such as the foreign ministers of arch-rivals Iran and Saudi Arabia, as well as the biggest ever U.S. delegation, including Vice President Joe Biden.

North Korea’s invitation, however, has been revoked, after it conducted a nuclear test, defying a United Nations ban.


The immediate problems of Middle East tensions, China’s turbulent markets and a tumbling oil price are likely to dominate corridor conversations at Davos.

But long-term concerns identified in the report center more on physical and societal trends, especially the impact of climate change and the danger of attendant water and food shortages.

While last month’s climate deal in Paris may act as a signal to investors to spend trillions of dollars to replace coal-fired power with solar panels and windmills, it is only a first step.

For businesses, the transition from fossil fuels remains uncertain, especially as political instability increases the risk of disrupted and canceled projects.

One wild card is cyber attack, which business leaders in several developed countries, including the United States, Japan and Germany, rank as a major risk to operations, although it does not make the top threat list overall.

The report analyzed 29 global risks for both likelihood and impact over a 10-year horizon by surveying nearly 750 experts and decision makers.

(Editing by Alexander Smith)