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Here are 5 key points to consider when looking at global markets today:
1. U.S. growth is set to decelerate in 2019
LEFT: This has been a slow but resilient expansion
The economic expansion enters its 11th year in July, making it the longest expansion since 1900. This economic expansion has been like a healthy tortoise – slow but steady. However, growth is set to decelerate further, and resume its expansion average pace of roughly 2%.
RIGHT: Consumption is the foundation of GDP
Consumption comprises 70% of GDP, and appears resilient for the second quarter. However, business fixed investment has weakened, and stronger net exports and a build-up in inventories that bolstered 1Q growth is likely to fade throughout the year.
2. Employment gains will likely be at a slower pace
The unemployment rate is like a playground slide: it rises steeply during a downturn, and falls steadily during a recovery and expansion, similar to the shape of a playground slide. However, at the end of every playground slide is a leveling off at the end to slow momentum. After reaching multi-decade lows, the unemployment rate is likely to now experience that leveling off and fall only modestly from here to 3.2-3.5%. After all, employment lags GDP growth by one to two quarters, so as growth decelerates, so will gains in employment.
Although wages experienced a modest acceleration, that is also likely to plateau from here as companies continue to resist raising wages, workers have limited bargaining powers given the decline of trade unions, and wages are pushed down by a wave of retiring baby boomers.
3. Corporate profits should achieve low to mid-single digit growth
Profit growth was extremely strong in 2018, but slowed considerably in the final quarter, rising just 3% year-over-year after three quarters of 25%+ year-over-year growth. 1Q19 growth was relatively steady from the previous quarter at 4%, despite initially very pessimistic analyst expectations. From here, earnings growth should continue to achieve low to mid-single digit growth for the rest of the year.
4. Inflation will likely remain subdued through 2019
Almost 10 years of monetary stimulus, economic growth and falling unemployment have succeeded in boosting home prices, bond prices and stock prices. However, they have not had a meaningful impact on consumer prices. Oil’s collapse brought headline inflation down, and despite a temporary rebound in oil prices, it failed to lift inflation. The Fed has acknowledged this persistently low inflation by lowering its projections for year-end inflation to just 1.5% on the PCE deflator.
Information technology continues to make consumer markets more competitive and this, along with likely only modest wage growth from here, suggests that CPI inflation will hover at just under 2% year-over-year over in 2019, with inflation as measured by the personal consumption deflator likely undershooting the Federal Reserve’s 2% target.
5. The global economy has slowed but not stalled
Amid global trade tensions that have intensified this spring and remain unresolved, along with political turmoil across Europe and a slowing China, the global economy is facing a slowdown. We have seen manufacturing activity, as measured by PMI data, dip into contractionary territory (below 50) in many regions, most notably China, Germany, the Euro Area, Taiwan and Korea. Services PMI, which has held up better than manufacturing, is also beginning to deteriorate. Still, the global economy is not likely to stall in 2019.
