Economic Outlook

Relationship Between the Labor Market and Inflation Not Yet Signaling Recession chart

Source: FactSet. Inflation measured by total CPI Y/Y % change.

After 2018 marked this expansion’s best year of GDP growth, we expect modestly lower growth this year. Late-cycle symptoms are sapping some of the U.S. economy’s momentum. That said, we still view a recession in 2019 as unlikely given the healthy labor market and still-positive business investment cycle.

No recession this year – We think predictions of an economic downturn are premature. The pace of U.S. GDP growth will likely wane a bit as the tax boost fades and the housing and auto cycles mature. However, manufacturing and service activity remain in expansionary territory, job growth is still healthy, and interest rates are not yet at levels that will snuff out growth.

Labor market still the key tailwind – Unemployment is at a 50-year low, and we anticipate it to move slightly lower this year. Historically, the unemployment rate has risen by nearly 0.5% before a recession began, so current employment conditions suggest the expansion will be extended this year. Additionally, the household savings rate has averaged 6.8% since 2014 (versus an average of 3.6% from 2004-2007), signaling consumers are not tapped out. Along with faster wage growth and lower gasoline prices, this should support ongoing household spending (the lion’s share of GDP).

Age spots bring new stripes – This is the second-longest expansion on record, and while age is just a number, we expect the complexion to change in this latter phase of the economic cycle. As the markets adjust to a more modest economic backdrop, they are likely to be more sensitive to what will probably be a more balanced mix of encouraging and underwhelming economic readings. That said, expectations have grown overly pessimistic, in our view.

Action for investors

Late-cycle conditions are likely to produce higher market volatility, warranting an equity-fixed income balance in line with your long-term target. We think the economic backdrop can still support stock market gains, but large-cap equities and sectors with less cyclical earnings offer an opportunity to reduce some risk within equity allocations.

Important Information:

*Source: MorningStar Direct, Ibbotson SBBI US Large Stock TR USD is used to represent S&P 500 returns. Past performance is not a guarantee of what will happen in the future..

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