Economic Outlook - January 2020
- According to the U.S. Commerce Department, third quarter Gross Domestic Product (GDP) increased 2.1%, above the economy’s growth potential of 2.0%. There was no revision to the estimate published in October. A tempered growth rate since the financial crisis is one of the driving forces behind the elongated bull market cycle. Corporate managers have practiced caution with capital allocation decisions since the financial crisis, which has resulted in fewer economic and business excesses. Slow growth and low inflation typically keep an economy from overheating.
- U.S. non-farm payrolls surged by 266K in December, far outpacing the estimated 187K. Average hourly earnings, rose by 3.1% over the year, an impressive increase on top of the 2018 3.2% wage pickup. Unemployment dropped to historic lows, matching the 1969 jobless rate of 3.5%. Consumer spending accounts for two-thirds of GDP and we expect a strong consumer to remain supportive.
- After three consecutive rate cuts from July through October, the Federal Open Market Committee voted to hold the bank lending rate steady at the current Federal Funds rate target range of 1.50%-1.75%. Last week’s release of the December meeting minutes point to a cautious Fed, willing to remain patient before raising rates as we saw from 2015-2018. Chairman Powell commented post meeting that a sustained uptick in inflation would be required before he considers voting to raise the benchmark rate again. History tells us a dovish Fed, and low interest rates, power the U.S. consumer and typically boost risk asset prices.
- Progress in trade negotiations between China and the U.S. increased optimism, lifting equity markets throughout the last quarter. Data on the results remain mixed, as current factory outputs declined in December to 10-year lows, with the ISM Manufacturing Index registering a 47.2 reading (a measure below 50 is a sign of contraction). The grounding of Boeing’s 737 Max fleet could be skewing the reading lower, as Boeing is the country’s largest exporter. Forward-looking data included a rise in demand and order volumes, which drove the IHS Purchasing Managers Index to 52.4, versus the bottom July reading of 50.2. Rising business orders reflect signs of renewed confidence from managements and their purchasing teams.
- Domestic housing demand became one of the major concerns to end 2018. Data throughout 2019 has reversed course, as one might anticipate during a declining interest rate environment, which saw three interest rate cuts from the Federal Reserve. The Case-Schiller Home Price Index rose 3.3% as of October, in line with September’s reading year over year. The National Association of Realtors reported home sales increasing 2.7% in November over the prior year. Continuously low mortgage rates, a strong consumer, and economic stability are all contributing to climbing home prices and strong sales.
Sources: Bloomberg LLC, FactSet, U.S. Department of Labor, U.S. Commerce Department, Bureau of Labor Statistics, Federal Reserve Bank, Empirical Research Partners
Disclosure: This commentary reflects the opinions of Welch & Forbes based on information that we believe to be reliable. It is intended for informational purposes only, and not to suggest any specific performance or results, nor should it be considered investment, financial, tax or other professional advice. It is not an offer or solicitation.
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