Economic Conditions Trend And Outlook For 2020

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.

Still interested in understanding more when it comes to today’s economic conditions? If so, contact our firm at 843-999-1570 and someone will be able to explain more in depth of what you need to know when it comes to the macro-economics in this global landscape! With that said, “We have great challenges & great opportunities, and with our help we’ll meet them together!” – Jason Pries

China: Friend or Foe

For all the headlines surrounding geopolitical and trade tensions with China, it also remains one of the world’s most important markets and one that’s vitally important to many American companies. Chinese consumer confidence hit a ten year high in 2019. But as happy as stock investors might be to see the globe’s second largest economy happily buying luxury goods, trips and food, a recent McKinsey & Company survey (China Consumer Report 2020) shows that consumer tastes in China are evolving. Like U.S. millennial’s, the digital native generation in China is increasingly health conscious and a more discerning customer.

In this era of increasing globalization, “domestic stock” is often a bit of a misnomer. Large cap domestic companies sell and manufacture more of their products in China than they do here in the United States. Here are some factoids about China that might encourage you to pay closer attention to China:

  • If measured by purchasing power parity, China is the world’s largest economy.
  • The Chinese population is 1.384 billion, compared with 329 million in United States (as of 7/2018).
  • Sales on November 11 (Singles’ Day) in 2020 were $58 billion, double the projected sales number of $29 billion in the US for the entire Thanksgiving through Cyber Monday period.
  • The IMF projects the Chinese economy will grow by 22% from 2019 to 2021 to $17.762 trillion. China’s growth in GDP in 2015 was equal to the GDP of Switzerland.
  • KFC (YUM) is the most popular fast food chain in China, followed by McDonald’s. (Business Insider recommends we try KFC’s Dragon Twister.)
  • General Motors sold 26.5 million vehicles in China in 2018, versus 21.5 in North America.
  • In the mood for your daily Starbucks fix? There are 4,000 locations in China.

Our media overemphasizes China’s centralized government and suppression of individual freedom and understates popular support for the current system. Riots in Hong Kong against mainland control also give the impression that the current government is under siege. That is untrue. China’s citizens generally support their government’s policies and perceive the U.S. as unfairly demonizing China due to its rapid growth. That’s leading to boycotts against U.S. brands. Domestic Chinese brands have steadily improved in quality, leading to a shift in consumer preference towards their domestic products.

Some psychology studies indicate we overweight familiar information and discount things we have trouble understanding. It’s tempting to dismiss China due to its distance and different culture, but that would be a mistake. For many companies, China is the elephant in the room. If we’re to make informed investment decisions, we need to see that elephant as it is.