U.S. outlook for 2019.

• Author: Witte, Willard E.

A year ago, we expected that 2018 would represent a step up from the "new normal" of 2.1 percent economic growth to a little above 2.5 percent, but we also said there was upside potential to about 3.0 percent growth if tax reform were enacted.

We expect now that 2018 will end up with output growth somewhat above that level (see Figure 1). We did not anticipate the additional boost from the budget deal on the spending side of the federal budget. This looks to add about 0.3 percent to GDP growth above what we expected. Other deviations from our forecast essentially balance out: Consumption and housing a little below our expectations were offset by stronger business investment; improvement in the trade deficit was offset by lower inventory accumulation.

The labor market is headed for another good year--and for the second year in a row better than our forecast. A year ago, we predicted that the economy would create jobs at a monthly rate around 175,000 and that the unemployment rate would fall a little to perhaps 4 percent. Instead, through October job creation has averaged 213,000, while unemployment has declined to 3.7 percent (see Figure 2). As we expected, the labor force participation rate (the proportion of the working-age population that is active in the labor market) has been stable.

Overall, the performance of the economy during 2018 has been positive, which is encouraging for the year ahead.

Looking to that future, we are forecasting another good year for the economy. But we do so with some quivers of dread. A few specifics:

* We expect output growth in 2019 to average close to 3 percent, but with deceleration as the year proceeds. By this time next year, quarterly growth will be below 3 percent heading toward equilibrium growth at a little below 2.5 percent.

* Job creation will continue the trends seen in 2018: Job gains will average close to 200,000 per month, with the participation rate flat.

* The labor market will be increasingly tight. The unemployment rate could decline a little, and firms unable to find workers will remain an important theme.

* Consumer spending will continue to advance, although at a rate below this year. Business investment will be good, but held back by trade worries. Housing will resume growth with a small boost from the aftermath of hurricanes Florence and Michael. Government spending will be strong early in the year, but growth could slow significantly toward the year's end. The trade balance will show...