United States

24 Jan 2020

Economic growth in the US has been on a softening path during 2019, with consensus expectations for Q4 of 1.6% being well below the likely outcome for the year as a whole of 2.3% and in major contrast to the 2.9% recorded for calendar 2018.

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This slowing reflects a range of influences, partly a delayed response to the Fed’s rate increases in 2018, partly a fading of earlier fiscal stimulus from President Trump’s tax reforms and partly concerns over the trade deal with China.  It is notable that US exports, though representing no more than 12% of GDP, are expected to have fallen over the year as a whole, though some resolution of the trade impasse should provide a better backdrop for global shipments in the year ahead.
Despite this slower pace of economic growth, new job creation has remained at heady levels, as can be seen from the chart below.  Although the twelve-month moving average is slightly lower now than a year ago, it nonetheless reflects a very strong latter half of 2019 compared with the earlier months of the year.  The fall in Treasury yields earlier in the year will have helped mortgage affordability and has turned housing starts into a positive contributor to activity.  
US Job creation remains robust

US Jobs creation remains robust

Source: High Frequency Economics Dec 2019

Apart from the focus on a potential détente in the trade war with China, the other principal political spotlight has been on the potential impeachment of Mr Trump and how that might influence the outcome of the next Presidential election, now due within twelve months.  The Democrat-led House of Representatives approved two articles of impeachment (for abuse of power and obstruction of Congress) in December following a three-month inquiry; the trial process under the US constitution will now move to the Republican-led Senate.
Given the composition of the Senate, an acquittal outcome is widely expected, though whether impeachment process itself will weaken the Trump re-election campaign is less clear-cut.
This will mark the third US President to undergo an impeachment trial, with both previous defendants (Andrew Jackson in 1868 and Bill Clinton in 1999) being acquitted.  Given the composition of the Senate, a similar outcome on this occasion is widely expected, though whether impeachment process itself will weaken the Trump re-election campaign is less clear-cut.
During the next few months the US election bandwagon will start to roll, with the early Primaries in February and March starting the process leading to the selection of the presidential candidates (July for the Democrats and August for the Republicans).  Currently there are still a dozen candidates in the running for the Democratic nomination, though only four appear to register support above 10% in surveys of Democratic Party voters.  It should of course be remembered that Donald Trump was not a front-runner for the Republican nomination at this stage four years ago!
Given his domestic and international political pressures, President Trump will need the economy to be in his favour in 2020.  This is all the more important since many of the “swing states” (those where the election outcome is least clear) have suffered more than average across the US from the recent growth deceleration and where workers’ weekly earnings are rising at only about half the rate experienced in the rest of the US.
He is likely to be helped by the probability that the Fed is on hold on its interest rate policy between now and November, but not by the fact that US corporates are prone to become less willing to sanction further capital spending the nearer one gets to the election.  The trend in US corporate profits might also constrain such expenditure: despite nominal US economic growth being above 4% for the past year and interest costs having fallen, corporate earnings are expected by analysts to emerge at almost identical levels to those of 2018, due to weakness in the energy and materials sectors.
The US equity market by contrast performed stunningly well over the past year, with a capital gain in dollar terms approaching 30%, all of which came from an upward re-rating of shares with no help from underlying corporate profits.  In the final quarter, investor returns were about 9%, though most of that would have been offset to sterling-based investors by the recovery in the pound.  That rise in indices means that Wall Street ends the year on a rating of about 20X likely corporate earnings but faster global growth in the year ahead indicates that corporate profits elsewhere in the world should rise more strongly than those in the US.

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