The 4Q19 Economic Picture and the 1H20 Outlook

We’re still missing a lot of information on the fourth quarter, but recent reports paint a picture of moderate growth in the overall economy. That picture will become clearer as December data arrive next month. The economy was mixed in 2019, and should remain mixed into the first half of the year.

Consumer spending accounts for 68% of Gross Domestic Product. Figures through November suggest about a 2.2% annual rate in spending growth for 4Q19. We’re missing December data and previous figures are subject to revision, so that estimate will change. However, it’s consistent with the underlying trend over the last year. Recall that spending growth in 4Q18 and 1Q19 were unusually soft. The government shutdown last year was a significant drag. Strength in 2Q19 and 3Q19 was about getting back on track.

Spending has been supported by job gains and wage growth. However, growth in average hourly earnings has recently suggested a shift. Production workers are seeing stronger gains, while others are seeing smaller gains. Those at the bottom of the income scale have seen significant improvement, largely due to increases in state and local minimum wages (the federal minimum wage is $7.25, unchanged since July 2009). The top 1% are doing well. The middle class continues to struggle amid higher health care costs (the health insurance component of the CPI rose 20.2% over the 12 months ending November), higher education costs, and a lack of affordable housing. While much of the debate on income inequality has focused on the top 1% and taxes, the whittling away of the middle class is a bigger concern for the long-term prospects of the U.S. economy. The economic prospects of middle class independent voters will be key in the November election.

Scott Brown
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Ex-food and energy, the PCE Price Index, the Fed’s preferred inflation gauge, rose 1.6% over the year ending November, still below the Fed’s 2% goal. The Fed fears that a prolonged trend below 2% will push inflation expectations lower, making it harder for the Fed to hit its target. Hence, monetary policy is likely to remain accommodative. The Fed is uncertain about the amount of slack remaining in the job market, but sees generally little flow-through from higher wages to higher consumer price inflation.

Business fixed investment was weak in 2019. A decrease in energy exploration (which is capital intensive) and problems at Boeing had an impact. Mining structures (which includes oil and gas well drilling) fell 15.0% over the year ending 3Q19 (vs. 60.7% in the 2015-16 energy correction). Boeing’s problems will continue. The halt in production of the 737 Max may subtract 0.5 percentage point from GDP growth. Trade policy uncertainty and slower global growth also kept business investment back on its heels in 2019. The trade truce with China is a positive development, but does not eliminate uncertainty. The global economy should pick up somewhat, with the Fed’s rate cuts helping emerging economies.