US Economic outlookBy: Ganesh Baniya

April 21, 2019

Topics to be covered

• Gross domestic products (GDP)

• Unemployment

• Inflation and current interest rate

• Trade war, Brexit and other global economy

• Some facts about US recession

• Economic summary

• Current stock market

• Any immediate threats to stock market?

Gross domestic products GDP

• Gross domestic products (GDP) refers to the value of everything produced by a country in a specified time (yearly/quarterly). Country’s GDP is a measured by consumer spending plus business investment and government spending and its net exports.

• According to third estimate released by Bureau of Economic Analysis- Q4 growth is reduced down to 2.2% from earlier estimate of 2.6%. Third quarter increase was 3.4%. This reduced 2018 real GDP growth to 2.9% (2.2% in 2017)

Gross domestic products GDP- Cont.

Gross domestic products GDP- Cont.

• Monthly economic data from the just-completed quarter suggest that the economy lost even more momentum in Q1-2019. It is estimated that the real GDP growth will fall from 2.2% in the last quarter of 2018 to only 1.8% in Q1, which would be the slowest rate of annualized growth in two years.

• This is mainly due to significant deceleration in consumer spending. The underlying fundamentals remain supportive of stronger growth in consumer spending in coming quarters. Household balance sheets are generally in good shape. In addition, indices of consumer confidence remain at high levels. The decline in mortgage rate has initiated new life back into the housing market. Government spending should grow strongly for the next few quarters. Q2 GDP growth is expected to be 3%.

Unemployment

• Hiring rebounded in March, February was slightly slow. Unemployment rate is at 3.8% which is very close with 49 years low. Unemployment is expected to remain below 4% through 2021.

• Average hourly wages (private sector) rate grew 3.2% compared to last year. This growth is best since 2009 recession.

Inflation and current interest rate

• Inflation is increase in prices and fall in the purchasing value of money, the most common mode of measurement of inflation is Consumer Price Index Components (CPI). Inflation is rising slowly but at manageable level.

• Rising material and labor costs have pushed inflation back up to the Fed’s 2 percent target

• Inflation is expected to be 1.8% in 2019 and 2% in 2020 and 2021. This is with in the Federal Reserve’s target rate.

Inflation and current interest rate

• Federal Reverse has indicated that the interest rate will remain at current rate of 2.5% through 2020. Wells Fargo even projected that it may go down to 2.25% by Q4 2020.

• Mortgage interest rates have improved

• President Trump has urged to reduce the rate to lift the economy. So, possibility of future increase of interest rate seems remote.

Trade war, Brexit and other global economy

• There has been progress on a U.S.-China trade deal, the full details and a final agreement has not been confirmed yet. Meanwhile, the United Kingdom is seeking another extension of the deadline to leave the EU by June 30.

• These two factors continue to add uncertainty in the Global outlook. Global economy in general and manufacturing output in particular have decelerated. Global growth appears to be slowing from last year’s strong pace.

Some facts about US recession

• Since World War II, US has 11 recessions, average time between: 6 years, 5 months and longest period US hasn’t gone without recessions is 11 years.

• Investors are worried in recent few weeks as the long-term US interest rate fell below short interest rate (03/22). Inverted yield curve has been perceived as an indicator of economic down turn. Now, long-term interest rate has reverted to being higher than short term.

• The yield curve inverted before each of the past seven recessions (with a range of 8-23 months).

• However, the yield curve did not invert during the 1954-1965 period and missed two recessions.

• It also gave false signals in 1966, 1986 and 1998.

Economic summary

• The US economy outlook is looking healthy according to the key economic indicators.

• GDP growth is expected to be at ideal range of 2-3% in 2019.

• Unemployment is continuing to be in lower range and inflation is at desirable level.

Current stock market

• Nasdaq performance YTD: 6,635 to 7,998

• Dow Jones performance YTD: 23,327 to 26,5560

• One of the biggest year for IPO• Lyft, IPO price: $72, first day close $78.29, now $58.36

• Pinterest, IPO price: $19, first day close $24.40

• Zoom (ZM), IPO price: $36, first day close $62

• Levi, IPO price: $17, fist day close $22.41, now $23.79

• Many other companies including Uber are planning IPO this year

• IPO performances also indicate that investors still have a huge craze for stock market

Any immediate threats to stock market?

• `Naturally, investors are watching for recessionary triggers. But, the fundamental indicators of economic health, the labor market and inflation etc. are holding a reasonable position and economy appears balanced and not poised to offer immediate threat to stock market. Since we are at the top of the economic cycle anything could happen, but the outlook for this year looks good.

References

• https://www.bea.gov/news/2019/gross-domestic-product-4th-quarter-and-annual-2018-third-estimate-corporate-profits-4th

• https://am.jpmorgan.com/us/en/asset-management/gim/adv/insights/market-insights/weekly-economic-update

• https://www.wellsfargo.com/com/insights/economics/monthly-outlook?utm_source=SFMC&utm_medium=email&utm_campaign=&utm_content=&utm_term=7230679&sid=29984

• http://www.worldbank.org/en/publication/global-economic-prospects

Thank you