Economic Outlook

Source: St. Louis FRED; 2019 YTD is from U.S. Census

We believe economic growth is set to slow in 2020 to just below the 10-year expansion average, with no catalysts such as tax cuts expected to reinvigorate growth. We expect consumers to fuel the economic expansion. Interest rate cuts enacted last year should provide a modest support to the economy in the first half of 2020.

Consumer demand propels the economy forward – A healthy labor market and low interest rates will help drive spending again this year, though with less potency than last year. As shown in the chart, U.S. retail sales grew 3.4% in the first 11 months of 2019, in line with the average pace of sales for the 10-year expansion. Monthly job gains are leveling off; we still expect the unemployment rate to stay under 4% this year. After a rough patch last year, the housing market should contribute to GDP growth in 2020, fed by historically low interest rates, a pickup in inventory and a steady return of homebuying demand.

Manufacturing ekes out growth – Trade uncertainty and lackluster business investment will likely continue to dampen growth in manufacturing. We don’t expect a comprehensive trade deal between the U.S. and China this year. Additionally, new tariffs against handful of countries could signal the trade overhang on manufacturing will continue in 2020. In our view, manufacturing should show a slow but steady expansion. Importantly, the lull in manufacturing growth has not spilled over to the much larger service sector.

Central bank policy, the oil that greases the wheel – We expect the Federal Reserve to maintain the current target of benchmark interest rates at 1.5%-1.75%, unless there is a downward shift in economic conditions. We expect the rate cuts enacted last year to help ease the frictions from geopolitical headwinds and election uncertainty, and help the economy avoid a recession this year.

Action for investors

Though slowing, economic fundamentals are solid enough to support rising share prices this year, but we expect lower returns and more volatility than last year. We recommend reviewing your portfolio to ensure that after a year of soaring equity returns, your equity-bond mix still reflects your risk tolerance.

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