Reducing Downside Tail Risks for 2020

Scott Anderson
Chief Economist

For the first time since early 2018 when the U.S.-China Trade War came on the scene and early 2019 when Brexit deadlines came and went, we believe downside tail risks for the U.S. and global economy are measurably easing.

Gray jigsaw puzzle pieces with a stray piece that has the British flag on it, with the EU logo underneath the puzzle.

The synchronized global downturn in economic growth that intensified in 2019 has been met with substantial global monetary easing, including three quarter point rate cuts from the Federal Reserve that has worked to keep global financial conditions loose and may yet help rekindle consumer and business confidence in 2020.

We do not think what happened this week with the historic victory of Boris Johnson and the Conservatives in the U.K., or the phase 1 trade agreement with China, will be a magic bullet that makes all the global economic problems disappear overnight, but it does reduce the prospect of a worst case global recession scenario playing out in 2020.

We are also somewhat more confident in our “no recession” call for the U.S. economy in 2020, and for the first time in a long time contemplating the possibility of upside U.S. growth surprises in the second half of next year.

We are not yet making any hard forecasts changes for next year until we see more of the details around the U.S. China trade agreement, and a specific Brexit agreement still needs to be hammered out with the EU by the end of January, but for the first time in a long time we see a faint glimmer of light at the end of the tunnel.

In the meantime, the U.S. and global economies remain on their pre-described slowdown paths that are expected to carry on in the first half of 2020. Fundamental global economic indicators continue to deteriorate into December, despite global equity markets hitting all-time highs.

Just this morning we got a reminder that in the U.S. it is not just business investment that is being held back because of trade and global uncertainties, but there are growing signs that the U.S. consumer is also becoming more cautious in their spending.

Retail sales growth has been limping along over the last three months compared to earlier in the year. The November retail sales report, while missing consensus expectations, was still in-line with our forecast for 2.3% real consumer spending growth in the fourth quarter. If realized, fourth quarter consumer spending will show a marked deceleration from Q2 and Q3 when real consumer spending jumped 4.6% and 2.9% on an annualized basis.

We think this consumer slowdown will continue in the first half of 2020 no matter what else happens on the U.S.-China trade front.

Supporting this forecast is real average hourly earnings growth that continues to weaken to just 1.1% year-on-year from 1.9% in February of 2019.

And last week’s initial jobless claims spike to 252k, the highest level since 2017, could be indicating some new signs of deterioration in the labor market. We will watching the U.S. labor market indicators for further signs of deterioration in the weeks ahead. Tail risks appear to be diminishing for the U.S. and global economies. However, substantial downside risks remain with a new one taking the top spot in my view– the possibility of financial bubbles and financial instability ahead.

To learn more, check out this week’s U.S. Outlook.

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A Positive Surprise From November Payrolls

Scott Anderson
Chief Economist

Nonfarm payroll growth accelerated to 266k jobs last month easily surpassing the consensus forecast looking for a 180k job gain.

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Why a Soft landing for the U.S. Economy Rings Hollow

Scott Anderson
Chief Economist

With U.S. stock prices near all-time highs, equity investors have already positioned themselves for a soft landing for the U.S. economy and an acceleration in earnings and economic growth next year.

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The Significant Other: Why Overlooking Women’s Economic Impact is Bad Business

Scott Anderson
Chief Economist

In August, the Business Roundtable said it was redefining the purpose of U.S. companies. The manifesto signed by 181 CEOs declared that corporations should do more than line shareholders’ pockets: they should also invest in their employees and protect the environment.
The statement was admirable and lofty, and as part of a company with best-in-class environmental policies, I was pleased with that news. That said, there’s a critical piece of sustainability missing from that charter.

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U.S. Outlook: Signs Still Point to Slower Growth Ahead

Scott Anderson
Chief Economist

The U.S. consumer is increasingly looking tired, and retail sales growth is on a clear downtrend.

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