Economic Growth Slowed in 2019 Q3

As the U.S.-China tariff war escalated in 2019 and investors became more concerned about the economy’s long-term prospects, GDP growth slowed to 2.1% in 2019 Q3. Private investment spending contracted for the second straight quarter by 1% as non-residential investment spending dropped by 2.3%, although residential investment spending rose 4.6%, buoyed by low mortgage rates. The pullback in business spending as somewhat offset by the expansion in private consumer spending that rose 3.2%, amid strong job growth. Net exports rose a modest 1% after contracting in the prior quarter, while imports increased 2% after a flat growth in the prior quarter. Government spending rose 4.8% due to the strong growth in federal spending of 8.3%.

Sustained Job Creation in 2019

Job creation remained strong in 2019, with 2.1 million net new payroll jobs created as of December 2019 compared to one year ago. Payroll jobs rose in all sectors except in utilities and mining/logging. The retail trade industry, which had been losing jobs in past months, created net new jobs (15,300). The construction industry created 143,000 net new jobs, although this is about half of the 342,000 annual jobs created in January 2019. The unemployment rate dipped to 3.5%, at par with 50 years ago. The number of 16+ year-old unemployed workers trended downwards to 5.75 million, near the level in 2000 (5.69 million).

Economic Conditions

Nonfarm payroll jobs increased in all states, except Wyoming, Oklahoma, and West Virginia. The states with the strongest job growth were Utah (3.0%), Texas (2.7%), Nevada (2.7%), Idaho (2.6%), Washington (2.5%), Florida (2.5%), Alabama (2.4%), Arizona (2.4%), Rhode Island (2.2%), and Colorado (2.1%).

Wage Growth Tapers as Inflation Picks Up

Even as the unemployment rate continues to fall, average weekly wage growth has tapered. In December 2019, average weekly rose 2.3% from one year ago, about the same pace as the inflation rate. Wages have been rising at slower pace since January 2019 while inflation has picked up, resulting in no real wage gains for workers. Meanwhile, CPI-Shelter, an indicator for the price of housing services (e.g., rent) rose 3.2%. Rent growth has generally outpaced inflation and wage growth since 2012, an indication that housing supply remains low relative to demand. Average weekly wages rose in all states, except in Wyoming, Ohio, Alaska, and Texas (this may just be a statistical fluke given Texas’ strong job growth.

Yield Curve Normalized in November 2019

The Federal Open Market Committee lowered the federal funds rate three times in 2019 by a total of 0.75%, to the current range of 1.5% to 1.75%. The yield curve normalized in November 2019 after it inverted in January 2019 when the 5-year T-note yield fell below the 1-yr T-bill rate.

Macroeconomic Outlook Conclusion

We expect GDP growth to pick up to 2.4% in 2020 given the de-escalation of trade tensions between the United States and China, starting with the signing of the Phase One Trade Deal in January 2020. We view this development as having a positive impact on investor confidence and rising business investment. Unemployment rate will further ease to 3.6%.

The Federal Open Market Committee to likely maintain the federal funds rate at the current range of 1.5% to 1.75%. Under an accommodating monetary policy, the 30-year fixed contract mortgage rate is expected to stay below 4%, which will support 5.5 million of existing home sales and 0.75 million of new home sales. Low interest rates will keep debt financing for new home construction low, encouraging the production of more homes. As builders continue to see strong demand for both owner-occupied homes and rentals, we expect builders to increase construction of new housing to 1.37 million, of which 415,000 (30%) will be multi-family units.

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