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8.B. - Page 11 of 122 suggesting the recession will begin in late 2020 or early 2021. It is unknown which event will be the tipping point, but economists are watching several factors. The federal economy (real gross domestic product) grew at a pace of 3.1 percent (year over year basis) in the 4t" quarter of 2018. The economy is operating at nearly full employment, with a national unemployment rate of 3.7 percent. Economists forecast that the unemployment rate will fall to 3.5 percent in 2019, and then gradually increase to 4 percent by the end of 2020. It is expected that the benefits from the fiscal stimulus of tax cuts and spending increases from 2018 will diminish by the end of 2019, causing real gross domestic product (GDP) to decrease to 2.1 percent in 2019 and to 1 percent in 2020. Economists are cautiously optimistic that trade disputes with China are easing as agreements on trade issues are being negotiated. However, the Chinese economy is currently contracting which is leading to cuts in production of U.S. goods such as Apple's iPhone. Slowing Chinese growth is a drag on world GDP growth. Lower growth rates for other countries exporting to China further slows U.S. exports to those countries as well. The outcome of the trade war with China could also have a significant impact on the economy. Should the tariffs be increased, costs for businesses and consumers will increase, probably initiating a slowing of both consumer spending and capital investment. This in turn could cause a substantial weakening of the economy. As of early December 2018, the U.S. and China agreed to a 90 -day trade truce to allow for continuing negotiations regarding technology transfer, intellectual property and agriculture. In the meantime, China has agreed to purchase a substantial amount of various products from the U.S. to reduce the trade imbalance between the two countries. Tight labor markets are pushing wages and salaries higher, and this is affecting corporate profitability. Profitability will impact earnings; lower earnings result in lower stock prices, which reduces household wealth. With the evaporation of significant household wealth (called the wealth effect), consumer spending is interrupted by declines in asset values, i.e. reduced investment income. This process, which ultimately affects consumer spending, is a key indicator that economists watch closely, as consumer spending is a major driver for the U.S. economy. The federal funds interest rate is holding steady for the time being as evidenced by the January 30 statement from the Federal Reserve that indicated it would be altering its plans to raise rates two or three times in 2019, to one of "patience" as it evaluates the economy. Consequently, as of now, it does not seem that interest rates will lead to the possibility of a weaker economy in 2019. There is, however, one reliable indicator of a recession: an inverted curve when comparing short-term interest rates and long-term interest rates. This indicates that the cost of borrowing money in the short- term is more expensive than borrowing in the longer-term. As of December 2017, the spread, or the difference in the yield between a long-term investment (10 -year Treasury note) and a short-term investment (3 -month Treasury bill) was 1.08 percent; as of December 2018, this spread had decreased to 0.45 percent. When the yield curve becomes inverted, this is reflecting the fact that short-term borrowing is more expensive than long-term borrowing. This has a direct effect on business investment, and ultimately leads to a contraction in the economy due to a slowing in production and rising unemployment. City of Redwood City 1017 Middlefield Road, Redwood City, CA. 94063 Tel: 650-780-7000 www.redwoodcity.org 237