Forget the Background Noise — The Economy is the Big Story
Author: Greg Valliere
December 2, 2019
WHAT A BUZZ-KILL YESTERDAY after a quiet Thanksgiving weekend — the Sunday talk shows breathlessly addressed impeachment proceedings (which are destined to fail) and the Iowa caucuses (which are still two months away). But there was hardly a peep about the big second half surprise: the U.S. economy has avoided recession and appears to be growing moderately again.
A TIP-OFF COMES FROM THE ATLANTA FED, which has dramatically revised its fourth quarter economic forecast, from 0.4% just a couple of weeks ago to 1.7% now. Other private forecasters are now close to 2% growth for this quarter; many cite the likelihood of continued solid consumer spending and signs that the manufacturing sector’s slump may have bottomed.
UPCOMING ECONOMIC DATA this week will provide important clues. This morning’s November ISM manufacturing index is expected to rise to about 49.5, up from October’s 48.3 level. And on Friday, the unemployment rate for November is expected to stay steady at about 3.6%, with solid nonfarm payrolls, perhaps a little over 180,000 new jobs, with decent wage growth.
WE CONTINUE TO BELIEVE that the biggest economic story of the year is the failure of anything close to recession to materialize, as the modest GDP recovery enters its second decade. In May and June, all the talk was about the inverted yield curve — what ever happened to that? — which was supposed to spark a recession and a grave threat to Donald Trump’s re-election. Actually, the economy is still his strongest asset.
THE ECONOMY COULD BE EVEN STRONGER if there was some clarity on trade; unfortunately, we think time is running out to finalize any deals this year. We wouldn’t be surprised to see a House vote to approve the U.S.-Mexico-Canada deal, perhaps as early as this week or next, but Senate ratification may have to wait until next year.
THE MORE IMPORTANT TRADE DEAL, of course, would be with China but progress is glacial. A dust-up between the U.S. and China over Hong Kong rattled the markets late last week, but that won’t necessarily derail a deal. We still think there could be an agreement in principle before the Dec. 15 deadline for new tariffs, but details of a deal may take many weeks to iron out. A Phase Two treaty, which would address the really big issues, is nowhere in sight.
THIS RAISES THE SECOND MOST IMPORTANT economic development in 2019 — the U.S. financial markets have learned to live with the tariff war. It’s a source of anxiety for farmers and small businesses, but last time we checked, the S&P 500 Index was up by an astonishing 25% this year.
DECEMBER IS AN HISTORICALLY STRONG MONTH for the stock market, so what better time to see economic Goldilocks prevailing once again? It’s quite a stew: low inflation, a great jobs market, modest economic growth, and remarkably low interest rates. And as a bonus, still another bullish signal: retail investors we talk with are nervous; many of them worry about the dysfunction in Washington, but it’s just background noise.
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