US outlook: consumers to the rescue
12 November 2019
By Henk Potts, Senior Investment Strategist
While growth is set to slow, healthy consumer spending and a robust labour market mean that a record period of economic expansion is not going to come to a dramatic halt.
The American economy’s resilience allows us to maintain a reasonably constructive view of the global economy. A near-term US recession still looks unlikely, although we forecast growth will slow to an uninspiring 1.6% in 2020, from a steady 2.2% in 2019.
Slowing global growth and the uncertain political backdrop will continue to impact manufacturing and exports. Recent data suggests that management teams are more nervous, resulting in more subdued levels of business investment.
In 2020, the US economy will also get less of a boost from the aggressive fiscal stimulus measures put in place in the early years of the Donald Trump administration. Signs of distress in debt (personal and national) and deficit levels could also point to further weakness ahead.
While pressures have been building, consumers remain the driving force behind the domestic economy, accounting for around 70% of activity. Household demand continues to benefit from solid labour market fundamentals.
The unemployment rate recently fell to 3.5%, the lowest in half a century. We believe that the US economy is robust enough to generate jobs growth of around 125,000 per month in 2020, helping to maintain the multi-decade low in the unemployment rate.
While pay growth has been less than economists would expect at this point in the economic cycle, slowing to 2.9% in September 2019, it’s still running comfortably ahead of inflation. The rise in real incomes has given consumers greater financial fire power helping to generate robust retail sales.
We believe that the US economy is robust enough to generate jobs growth of around 125,000 per month in 2020, helping to maintain the multi-decade low in the unemployment rate.
October’s truce in the trade war with China should help to reduce some of the pressure on the US economy in 2020. Escalating trade tensions would likely have further slowed global growth thus reducing demand for US products and services. Additionally, rising producer and consumer prices could have increased costs for businesses and resulted in a weakening of domestic consumption.
Despite the more positive signs, the risk of a trade war hasn’t disappeared overnight and any agreement remains vulnerable to a volatile president.
The outcome of the 2020 presidential election will significantly impact the medium-term outlook for the US economy. While the Democratic candidate is unknown, there are likely to be significant policy differences with President Trump over taxation, climate change, regulation and international relations.
Measured rate cuts
The US Federal Reserve has embarked on “insurance cuts”. These measured rate cuts reduce the risk of a policy mistake-induced recession and are expected to support growth prospects. Lower rates cut the cost of financing, create a wealth effect (boost asset prices) and enhance business confidence.
Future cuts are likely to be data dependent, but there’s little evidence to suggest that the US central bank will need to rapidly slash rates in 2020. Thus, the US’s relatively stronger growth profile and interest rate differential should continue to be a source of dollar strength.
While dark clouds may continue to gather, the fundamentals of the US economy remain healthy. So there is little reason to believe this record period of economic expansion is about to come to a dramatic halt.
While dark clouds may continue to gather, the fundamentals of the US economy remain healthy.
We give you versatility and a choice of services
Barclays Private Bank provides discretionary and advisory investment services, investments to help plan your wealth and for professionals, access to market.
Investments can fall as well as rise in value. Your capital or the income generated from your investment may be at risk.
This document has been issued by the Investments division at Barclays Private Banking and Overseas Services (“PBOS”) division and is not a product of the Barclays Research department. Any views expressed may differ from those of Barclays Research. All opinions and estimates included in this document constitute our judgment as of the date of the document and may be subject to change without notice. No representation is made as to the accuracy of the assumptions made within, or completeness of, any modeling, scenario analysis or back-testing.
Barclays is not responsible for information stated to be obtained or derived from third party sources or statistical services, and we do not guarantee the information’s accuracy which may be incomplete or condensed.
This document has been prepared for information purposes only and does not constitute a prospectus, an offer, invitation or solicitation to buy or sell securities and is not intended to provide the sole basis for any evaluation of the securities or any other instrument, which may be discussed in it.
Any offer or entry into any transaction requires Barclays’ subsequent formal agreement which will be subject to internal approvals and execution of binding transaction documents. Any past or simulated past performance including back-testing, modeling or scenario analysis contained herein does not predict and is no indication as to future performance. The value of any investment may also fluctuate as a result of market changes.
The value of any investment may also fluctuate as a result of market changes.
Neither Barclays, its affiliates nor any of its directors, officers, employees, representatives or agents, accepts any liability whatsoever for any direct, indirect or consequential losses (in contract, tort or otherwise) arising from the use of this communication or its contents or reliance on the information contained herein, except to the extent this would be prohibited by law or regulation.
This document and the information contained herein may only be distributed and published in jurisdictions in which such distribution and publication is permitted. You may not distribute this document, in whole or part, without our prior, express written permission. Law or regulation in certain countries may restrict the manner of distribution of this document and persons who come into possession of this document are required to inform themselves of and observe such restrictions.
The contents herein do not constitute investment, legal, tax, accounting or other advice. You should consider your own financial situation, objectives and needs, and conduct your own independent investigation and assessment of the contents of this document, including obtaining investment, legal, tax, accounting and such other advice as you consider necessary or appropriate, before making any investment or other decision.
THIS COMMUNICATION IS PROVIDED FOR INFORMATION PURPOSES ONLY AND IT IS SUBJECT TO CHANGE. IT IS INDICATIVE ONLY AND IS NOT BINDING.