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Economics & Markets

Question marks hang over US economy heading into 2020

By Diana Mousina
Economist - Investment Strategy & Dynamic Markets Sydney, Australia

It’s difficult to predict the short-term future of the US economy. While it is expected to exhibit slow but steady growth in 2020, with far less volatility than we saw this year, overall readings over the past few months have been very mixed and paint a conflicting picture of the immediate outlook.

On one hand, the US labour market is still very robust, which is heartening for consumers, and this confidence in job security is propelling consumer spending and US retail sales. Strong results for Black Friday and Cyber Monday have given welcome relief to retailers, and consumer spending remains a significant economic driver, although it can’t support the economy on its own and remains in decline overall.

The relatively low rate of unemployment rate is also a positive sign, hovering at well below 4 per cent, and wages growth is slowly rising. Both are promising indicators that a US recession will be avoided, and that higher growth will return in time.

The possibility of an impasse over the Federal Budget has been delayed for the time being, with Congress passing a Continuing Resolution (CR) to fund the Government until December 20, at which point another CR will be required for funding to continue into the New Year.

On the other hand, inflation remains well below the US Central Bank’s 2 per cent target and there are no indications it will rise again any time soon. The US Central Bank has cut interest rates three times this year in response.

The US is also experiencing an ongoing decline in manufacturing. The US Institute for Supply Management (ISM)’s manufacturing indicator pointed to ongoing weakness in a recent update, with activity contracting for a fourth straight month in November despite improved business sentiment. A separate survey from IHS Markit unexpectedly showed expansion in manufacturing and new orders, but the industry nevertheless remains a hurdle for economic recovery.

This malaise is generating concern due to the substantial role manufacturing has played in supporting US economic growth (around 11 per cent), and the subsequent impact of weakness in this sector on the country’s broader performance. There are no signs that the decline in manufacturing output has bottomed, so we could see further contraction into early 2020.

According to the ISM, global trade remains the most significant cross-industry issue, and one of the greatest factors in the decline of manufacturing is ongoing uncertainty around the US-China trade war. Until phase one of a new deal between the two countries is signed (expected in the next few months at the earliest) this risk will continue to loom, over the prospect of short-term economic growth.

On the upside, manufacturing could be soon given a much-needed shot in the arm by Boeing, which hopes to soon resume deliveries of its grounded 737 MAX after fatal crashes earlier in the year. The strike at General Motors has ended, and automobile production should also be on the rise again as a result. However, a full revival of US manufacturing will likely rely on a complete US-China trade deal, which could still be a long time coming.

The US Commerce Department also released disappointing figures for construction spending this month, as investment in private projects dropped to its lowest level in three years.

In more promising news, official estimates from the Department show the economy growing at a moderate rate over the July-September quarter. Although GDP growth is likely slipping in the current quarter, it isn’t expected to be as severe as it might have been.

These economic indicators all tell a different story of the overall health of the US economy, but we expect certainty to be restored in early 2020 as several changes come into play over the next few months. A US-China partial trade deal is the most promising of these, and progress on this front will remain squarely in the spotlight as we close out the year.

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Diana Mousina, Senior Economist
  • Economics & Markets
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  • Opinion
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While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455)  (AMP Capital) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided and must not be provided to any other person or entity without the express written consent of AMP Capital.


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