The U.S. economy is growing even more rapidly than initially thought, the International Monetary Fund said Thursday, though it warned that President Trump’s trade war could slow momentum.
The U.S. economy is on track to expand by 2.6 percent this year, the IMF predicted, up from its April forecast of 2.3 percent growth. The increase is largely the result of a better-than-expected start to the year and the Federal Reserve signaling it is likely to lower interest rates.
“The revision to 2019 growth reflects stronger-than-anticipated first quarter performance,” the IMF wrote in its World Economic Outlook, adding that the Fed’s “dovish tilt” has “helped markets regain their poise.”
Last year, the U.S. economy grew at nearly 3 percent. The White House forecasts the nation will hit that level again, but the vast majority of independent economists predicts that growth will cool as the stimulus from the tax cuts begin to wear off. If the IMF projection is correct, it would still be a strong year.
Wall Street and the White House will get the latest checkup on the U.S. economy on Friday, when the Commerce Department releases its initial estimate of second-quarter growth.
The trade tensions initiated by Trump remain a key threat to growth in the United States and abroad. The IMF was especially critical of Trump’s push to use tariffs as a negotiating tactic.
“Countries should not use tariffs to target bilateral trade balances or as a substitute for dialogue to pressure others for reforms,” the IMF warned. “Risks to the forecast are mainly to the downside.”
Morgan Stanley, a Wall Street firm, said Monday that there is a “credible bear case” for the U.S. economy falling into a recession in the coming months if Trump continues to escalate the trade war.
The tariffs already in place, along with Trump’s threats to put even more on China and Mexico, have already triggered a decline in business sentiment and a pullback in business investment. If that spills over into slower hiring, it likely will spook U.S. consumers and cause them to cut spending, Morgan Stanley warned.
Consumer spending powers 70 percent of the economy, which is why there is so much attention going forward on how healthy that remains.
The IMF cautioned that a lot of the factors that boosted growth earlier in the year, such as companies beefing up their inventories, are not expected to last.
“Domestic demand was somewhat softer than expected and imports weaker as well, in part reflecting the effects of tariffs,” the IMF said. “These developments point to slowing momentum over the rest of the year.”
The IMF predicts growth will slow to 1.9 percent in 2020, a pace that many economists say is the long-run average for the United States.
Though the IMF boosted its growth forecasts for the United States, it scaled back predictions for China and India as well as the overall global growth estimate. China has been hit hard by tariffs, causing growth to moderate to an expected 6.2 percent pace this year, according to the IMF, while India is expected to slow to 7 percent.