Growth is still above potential, but trade wars and flagging business investment could yet knock things off track
by Megan Greene / August 8, 2019 / Leave a comment
“The key to whether a manufacturing recession bleeds into an economic one is President Trump’s trade policy.” Photo: Michael Brochstein/SIPA USA/PA Images
The US equity and bond markets are telling completely different stories about the outlook for the country’s economy. In the first seven months of 2019, the S&P 500 index rose by 10.2 per cent, suggesting firms could continue producing strong corporate earnings off the back of decent economic growth. Over the same time period, borrowing costs on 10-year Treasuries fell from 2.68 per cent to 1.89 per cent, sign-posting lower rates and inflation, and the likelihood of recession ahead. This economic recovery in the United States is the longest on record, and analysts are on the lookout for signs it is ending. Who has it right—equity or bond investors?
For the next year, I think equity investors have a more accurate read on the US economy. To be clear, US growth is slowing down. It is unreasonable for anyone to expect the US to continue growing above potential—around 1.75 per cent—in the absence of significant stimulus measures, a jump in productivity or an increase in the labour supply.
The main factor propping up US growth is consumption, which accounts for nearly 70 percent of gross domestic product. In the second quarter of 2019, consumer spending grew at an annual rate of 4.3 per cent—a stellar result this late in the business cycle. Consumer confidence remains close to post-crisis highs, according to the University of Michigan’s consumer sentiment index.
Consumption has been underpinned by a strong labour market, with unemployment falling to 3.7 per cent—close to the lowest in nearly 50 years—while the US has added an average of 165,000 jobs per month this year so far. Annual wage growth was 3.2 per cent in July compared with a year earlier. That is robust for this cycle (though admittedly still weak by historical standards). There are few signs in the employment data that point to an imminent recession.
What has analysts concerned is a collapse in business spending. Investment was a drag on growth in the second quarter of 2019, as firms faced a double whammy of slower demand from abroad and heightened uncertainty about trade.
Industrial and manufacturing production fell in the first two quarters of 2019, indicating that the manufacturing sector is in recession and raising concerns that a general recession will soon…
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