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Top bank economists see slower growth in 2019, conflicting signals from data

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Top bank economists see slower growth in 2019, conflicting signals from data

The U.S. economic expansion is due to become the longest on record this year, though growth will likely moderate in 2019 and 2020, according to chief economists at major North American banks.

The group of 15 economists continues to see incoming economic data as positive, though the "downside risks to the economy have materially increased in recent months," said Robert Dye, chief economist at Comerica Bank and chairman of the American Bankers Association's Economic Advisory Committee.

The committee's median projection has GDP growing by 3.1% in 2018, then dropping to 2.1% in 2019 and 1.7% in 2020.

At a news conference, Dye said economic and market data are telling a "dual story" of continued strengthening in the near term but growing risks to the outlook going forward, partly due to ongoing trade tensions and expectations that global growth will slow.

For example, the Institute for Supply Management's manufacturing index for the U.S. remained in positive territory in December 2018 but saw a significant drop from the previous month, Dye said.

That result had helped fuel a sell-off in the stock market that subsided Jan. 4, when an above-consensus jobs report showed the U.S. added 312,000 jobs in December 2018 and Fed Chairman Jerome Powell said the Fed "will be patient" on tightening monetary policy. Committee members see the Fed raising their benchmark federal funds rate twice this year at most.

They also are projecting the labor market will continue strengthening, with the unemployment rate falling to an estimated 3.5% by the end of 2019. Wages should also continue rising, though overall inflation pressures will remain muted and prices will grow around the Fed's 2% target for the foreseeable future, the projections show.

Despite the recent market volatility, the consumer sector remains strong and makes up about two-thirds of GDP, Dye noted. A healthy consumer sector can help stabilize other weaker sectors of the U.S. economy and give the country "the opportunity to shed some of these shocks from outside."

"Right now, we're in a fairly nervous period in terms of financial markets," Dye said. "My expectation is that the strong fundamental economic data helps to stabilize that nervousness going forward."

Still, he added, committee members were split on whether the downside risks may lead to a bleaker overall economic picture and increase the risk of a recession. But the economists are not currently forecasting a recession in 2019 or 2020, seeing a 20% chance for one this year and a 35% chance in 2020.

He also commented on whether the partial U.S. government shutdown, which has now stretched into its third week, will dent GDP growth. Dye said despite the significant disruptions for the nearly 800,000 workers affected by the shutdown, it has so far been only a "minor drag" on the economy.

"However, an extended shutdown would result in a meaningful weight on the economy and severe hardship for the families who are missing their paychecks," he added.