Economy's strengths in 2019: Strong job market, consumer spending and low inflation

The stock market’s recent sell-off has stirred fears of a recession next year.

But a post-Christmas rally that has lifted stocks this week is likely rooted in this reality: Some key engines, such as a healthy labor market, will continue to drive the economy forward in 2019.

While growth is expected to ease from a projected 3 percent or so in 2018 -- which would be a 13 year high – to about 2.5 percent in 2019, that would still be a solid performance and top the 2.2 percent average during the nine-year-old economic expansion.

Here’s a rundown of the economy’s strengths heading into 2019:

Jobs

Average monthly job growth is forecast to slow from well over 200,000 this year to about 160,000 in 2019, says economist Michael Feroli of JPMorgan Chase. But that’s still more than enough to keep pushing down the unemployment rate.

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And payroll gains won’t be slowing because employers don’t need as many workers but rather the opposite: The 3.7 percent unemployment rate, a near-50-year low, will make it increasingly challenging to find them. Job openings hovered near a record 7.1 million in October. That means there were 1 million more openings than unemployed people, giving workers increasing leverage over employers.

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Until now, the improving labor market has drawn in lots of prime age workers on the sidelines, keeping unemployment from falling even more rapidly. But Feroli says that surplus labor supply is running thin. By the end of 2019, he expects the jobless rate to tumble to 3.3 percent, which would be the lowest since 1953.

That would further stoke wage growth that has picked up in recent months to a nine-year high of 3.1 percent annually as . Economist Paul Ashworth of Capital Economics looks for 3.5 percent average pay increases next year while Feroli forecasts upwards of 4 percent.

Consumer spending

Americans’ purchases make up nearly 70 percent of economic activity and that engine is expected to continue to underpin growth in 2019. Workers’ fatter paychecks should partly offset reduced income gains economy wide as a result of the slower pace of job growth.

Meanwhile, the lift to spending from the federal tax cuts that Congress passed late last year has largely played out, Feroli says. Much of that void can be filled by cheap oil and gasoline. The average household should save $224 to $480 on gas next year, depending on how low pump prices go and whether they stay there, according to Moody’s Analytics.

All told, consumer spending should grow 2.7 percent next year, in line with 2018’s increase, according to the Wolters Kluwer survey. Feroli predicts just a 2.4 percent rise, adding that higher interest rates and tighter bank lending standards will crimp outlays.

"We still expect consumers to spend relatively freely but they're going to be a little more cautious," says economist Gregory Daco of Oxford Economics.

Low inflation

Despite faster pay increases, most economists expect inflation to remain tempered next year. The Federal Reserve predicts its preferred measure of overall annual inflation will rise from November’s 1.8 percent to 1.9 percent by the end of 2019. It expects a core measure that excludes volatile food and energy items to tick up from 1.9 percent to 2 percent -- which is right at the Fed’s target.

That’s unusual because companies typically offset their higher labor costs by passing them along to consumers through higher prices. The may not be able to do as easily nowadays because of broad trends, such as the spread of discounted online shopping and the more global economy.

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Another reason inflation will remain modest is that oil and gasoline prices have fallen amid rising supplies and cooling global demand.

That’s all good news for Americans: It means their bigger paychecks shouldn’t be eaten up by higher retail prices. And it gives the Fed more leeway to increase interest rates gradually.