A view of the U.S. economy is highly speculative with all the known unknowns: Trade Wars, Impeachment, Brexit, and the U.S. Presidential Election to name a few. Nonetheless, we look for modest growth of 2% in 2020 as measured by Gross Domestic Product (GDP). Heightened concerns of a recession that peaked in the summer have now lessened, and the risk to lower growth appears to have dissipated. Consumer spending has provided the steady growth in GDP as it accounts for 70% of the overall economy. In the chart below, GDP has grown the last few years propelled most recently by consumer spending and tax cuts.
In 2019, business investment weakened, manufacturing contracted, and housing stalled, but the consumer spent. This spending was due to strong job growth. Even with low wage growth, these job gains have helped put more money into the hands of consumers, which enabled households to increase spending and drive GDP greater than 2% which has been the most recent historical average. In our opinion, as job growth continues, consumer spending is likely to remain strong, and the expectations of 2% growth in GDP is likely to be a conservative estimate for 2020.
Job growth was strong in 2019, but slowed recently, partly a reflection of a tight labor market. The unemployment rate fell to a 50-year low. We expect the rate to bottom out at 3.5% in 2020. Chairman Jerome Powell of the Federal Reserve spoke about the unemployment rate and indicated that even though it is at a generational low, the Fed predicts that there is still slack remaining in the job market; so although we may be close to full employment, the unemployment rate should remain low for a few years.
Inflation has not been an issue for a long time. Inflation is a lagging indicator and normally follows periods of full employment. A tight labor market driving wages higher would lead to inflation. Measured by the Consumer Price Index (CPI), inflation is such a concern to the U.S. economy that the Federal Reserve charged its mandate to control it. We expect CPI to average 2%-2.25% in 2020. This expectation is based on what Jerome Powell said at the conclusion of the last Federal Open Market Committee (FOMC) meeting.
Business fixed investment which was weak in 2019 will likely strengthen in 2020 as fundamental catalysts are improving. Contracting energy exploration spending, problems at Boeing, and the General Motors strike were major reasons for weaker business investment. Growing trade uncertainty with China and slower global growth was a theme in 2019 as well. We expect these issues to be less of a concern in 2020.
The housing market has stabilized and is growing modestly. We expect housing starts to grow 2% to 3% over the next few years and at the current level of 1.2 million, it should rise to 1.3 million units per year.
The Federal Reserve made three major policy changes in 2019. In January, the Fed paused and dropped its hiking bias for the Federal Funds rate. In June, the Fed pivoted to cutting rates in response to greater risks from a prolonged trade war and weaker global economy. In response, the Fed cut rates three times in a “mid-cycle adjustment”, to a current range of 1.5%-1.75%. In October, the last policy change occurred as the Federal Reserve suspended cuts and indicated that monetary policy is “in a good place”, and further cuts would be dependent on a “material reassessment of the outlook.”
What does this mean for the financial markets? Interest rates on the curve (5-30 year maturities) should head up modestly as inflation picks up and the economy stays out of a recession. This is positive for stocks. If the numerous possible risks continue to be avoided, consumer spending should allow for modest growth in GDP. As long as we avoid a recession in the next 18 months, stocks should, in our opinion, be able to produce a modest return. This is true especially if long rates do not surge as bonds presently offer limited competition for stocks, which compared to bonds look relatively inexpensive. Bonds are overpriced and risky in my opinion and stocks provide a better relative expected return potential. Stock returns will most likely be in the single digits but could easily turn negative if the economy begins to look like it is rolling into a recession. This is not my baseline forecast, but a possibility to closely monitor. 20/20 vision for 2020 would be nice, but the reality is the 2020 outlook is blurry.
You should evaluate with your financial advisor on how best to be positioned given your particular age and life circumstances. For more information on diversification, you can download a couple of free chapters of my book, Wiser Investing: Diversify Your Portfolio Beyond Stocks and Bonds.
The information is for informational purposes only. The opinions expressed or implied are exclusively those of the writer and are not to be attributed to, or presumed to be endorsed by, the author’s employer or any company with which the author is affiliated and are subject to change without notice.
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