Business as usual

We expect economic conditions to become challenging along multiple dimensions
Chief Investment Office10 Jan 2019
Photo credit: AFP Photo

Although difficult to price and likely to be several quarters away, the probable contours of a sharp slowdown in the US economy are beginning to emerge.

At first glance, this may appear to be an odd time to talk about an impending growth slowdown in the US. Presently, real GDP is expanding robustly (Atlanta Fed’s Nowcast suggests around 3% growth in recent months), inflation is modest (latest prints show core PCE at 2% and headline at 2.3%), wages are picking up gradually (average weekly earnings growth has been over 3% in 2018), the Fed is hiking as per expectations, and business surveys reflect buoyant confidence. Trade wars, oil price volatility, midterm elections, rising rates, and a strong US dollar have not dented the momentum of the world’s largest economy.

Indeed, we think that near-term downsides to the US economy are minimal. Labour market tightness, wage upside, fiscal stimulus (tax cuts, farm subsidies, defence spending), and strong business sentiment will likely keep growth comfortably in the 2.0-3.0% range in 2019, in our view. The chance of wage and inflation surprising on the upside is rising, but we do not see anything alarming in the pipeline. Fiscal slippage concerns are real, and the supply of treasuries has ballooned, but the gap between supply and demand does not appear glaring as long-term rates have not galloped ahead of Fed policy tightening so far.

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