Mixed Outlook for U.S. Remains, Signs of Life from Abroad
This was an important week for U.S. and global economic releases, which will help set the tone for the first quarter of 2020.
The takeaway from all the latest reports is that the U.S. economic outlook remains mixed with the balance of indicators continuing to point toward further slowing in the months ahead.
But on the bright side, the U.S slowdown glide path we are on is gradual.
Hard data like industrial production we received this morning, and downward retail sales revisions in Q4 ensure a sharp slowdown in real consumer spending to around a 1.6% annualized growth rate in the fourth quarter along with continuing declines in structural and business equipment investment.
On the other hand, the nearly 17.0% gain in housing starts in December, point to another quarter of solid gains from real residential investment. Moreover, softer U.S. survey data have stabilized or improved somewhat with the signing of the phase 1 trade agreement between the U.S. and China, and with U.S. equity markets reaching new all-time highs.
The three quarter point rate cuts from the Fed in the second half of 2019 and easing of global trade tensions between the U.S. and China, are helping to stabilize global sentiment and activity too, especially it seems in China and the Eurozone.
Expectations had gotten so negative late last year, but recent economic data have managed to exceed forecasters expectations in both regions. It remains to be seen if the improvement will just be a temporary blip or the start of a more prolonged recovery.
This has allowed longer-term bond yields in Germany and Japan to rise off of their September lows. The German 10-Yr Bund, while still at negative 22 basis points, has risen almost 50 basis points since September. This is easing downward pressure on U.S. bond yields as well.
Another factor pushing on nominal bond yields in the U.S. has been rising bond market inflation expectations. The 10 Year Treasury inflation breakeven has increased by 24 basis points since October.
Further gains in the 10-year Treasury yield this year will be more difficult without a material change to our inflation or growth outlook for the United States. Real GDP growth in the U.S. for Q4 looks to be around 2.1% right now with our estimate for Q1 at 1.7%.
In short, where we see the greatest upside to our growth outlook today is not in the United States, but in China and Eurozone economies where we have further slowing penciled in.
China’s GDP growth in 2019 came in at 6.1%, beating our 6.0% forecast. Our estimate for Chinese growth of 5.6% in 2020 appears too low now. Our Eurozone forecast of 0.7% for 2020 may also end up being too low. 2020 recession fears continue to diminish with most analysts now pushing out their estimates for the next downturn in the U.S. economy for 2021 or 2022.
That’s a good thing and a better start to the year than we had in 2019. The longest post-war expansion in the United States appears to have a few more rounds to go.
To learn more, check out this week’s U.S. Outlook Report.