It is that time of year for economic forecasts, so here is my forecast for the San Antonio economy in 2019. An update of the San Antonio economy through October and more detail on the forecast can be found here.
Like the U.S. and Texas economies, the San Antonio economy continues to show healthy growth. Employment through October grew 2.47% compared to October 2017, which is about at the historical average growth rate for the region. This is not bad given the extraordinary length of this expansion. The unemployment rate in San Antonio was at 3.2%, the second-lowest among the major metropolitan economies in the state. However, growth in San Antonio has been pretty strong across all sectors of the economy up until about six months ago when year-over-year employment growth in many sectors started to slow and even turn negative. These trends are shown in the following graph where it is clear that growth in the information, construction and mining, manufacturing, and professional and business services industries has started to decline.
It is also a sign of economic strength that the unemployment rate in San Antonio is so low. There is mounting anecdotal evidence, though, that the labor market is very tight. There are surely people who are still underemployed or who are not counted as unemployed because they have dropped out of the labor force, but I think we are at the point where growth is going to be driven by growth in the labor force and/or increases in productivity. This is going to be a constraint on growth into the near future.
Similar trends are also occurring at the state level, and the leading index for the Texas economy has been trending down since about May. It is too early to tell if this is an indication that the Texas economy is headed for a downward turn, but it bears watching.
On the national front, one of the best predictors of a downturn in the economy is the yield curve. The yield curve is very close to inverting, and in fact, the yield curve based on the difference between the 5-year and 2-year bond rates has already inverted. Once the yield curve inverts, it is a good bet the economy will move into a recession not too long after the inversion. Relatedly, recessions are typically preceded by the Federal Reserve raising interest rates, which they have been doing and are most likely going to continue to be doing. The housing market nationally and in San Antonio has been strong for a number of years now, but it got a bit frothy, again, and while it remains strong in San Antonio, it is starting to soften in other major metropolitan areas in Texas, particularly Dallas, and other parts of the country.
There are also some worrying trends in the global economy as growth has slowed in China and many countries of the European Union. While there are surely many factors playing into this, the trade war is not helping matters.
The current expansion is now the second-longest in our nation’s history. It is not going to go on forever. Sorry, but if we learned anything from the Great Recession, it is that the business cycle is not dead. There is typically a trigger, though, that turns the economy into a recession. As already mentioned, the inverting of the yield curve, raising of interest rates by the Federal Reserve (which, by the way, is the right thing for them to do, in my opinion), the trade war, Brexit, severe downturn in the housing market, and slowing global growth could each be that trigger. There may also be others not mentioned.
The upshot is that I believe we will continue to see the San Antonio economy grow into 2019, but I predict (as do many other economists) that we will move into a recession toward the end of 2019 or in 2020. It may not be as severe as the Great Recession, but I am very concerned about the federal government’s ability to respond to it. This is due to the fact that the Federal Reserve may not have as much room as they need to lower interest rates, which may mean they have to resort to quantitative easing again. But, there could be pressure not to implement such a policy again. A similar issue concerns me with respect to the ability of the federal government to provide any sort of fiscal stimulus given the increasing federal budget deficit due to the recent tax cuts of the Trump Administration. If the deficit is over $1 trillion by the time the recession hits, are the policymakers going to be willing to provide an economic stimulus large enough to pull the economy out of the recession, since it will make the deficit even worse?
In this environment, I think San Antonio will continue to see growth in 2019, but the growth in employment will likely slow to somewhere in the range of 1.75-2.25%. The unemployment rate is also likely to tick up a bit to about 3.5-4.0%.