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US outlook: consumers to the rescue

5 minute read

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.

Consumer strength

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.

US unemployment rate hits five-decade low

Trade hopes

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.

Presidential elections

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.

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