An economy in transition: UMB Investment Management’s Q4 2018 economic and market overview
The stock market, a leading indicator, sent a strong message in the fourth quarter that the economy was in transition.
From Oct. 3 to Dec. 24, the S&P 500 declined 20% historically, signaling a looming recession. In addition, the Federal Reserve suggested that short-term interest rates will continue to move higher. However, the economic data merely implied a slowdown in GDP, nothing close to a recession.
Synchronized Global Slowdown
Last year, the theme was synchronized global growth. Virtually every economy around the world was expanding. In the fourth quarter, the transition started, moving to a synchronized global slowdown theme. The manufacturing data provides confirmation. From late 2016 to late 2018, global manufacturing data supported robust economic growth. Current data points to moderate growth of approximately 2% GDP. In the U.S., the manufacturing data has rolled over. However, economic variables cannot be viewed mutually exclusively. In past cycles, prior to a recession, declining
manufacturing data is confirmed by the non-manufacturing data, or service data. Today, the non-manufacturing data does not confirm an oncoming recession. Instead, the data supports our forecast of moderate economic growth.
Just a quarter ago, consumer confidence was close to an all-time high. The drivers of confidence can be: the labor market, interest rates, stock prices, home prices and energy costs. Confidence data transitioned sharply in the quarter, declining due to significant volatility of stock prices and the threat of higher interest rates. Yet the confidence level remains elevated, suggesting consumption growth will continue. Given the Fed’s tactical pause on short-term interest rates and the rebound in stock prices through January, confidence should rebound as well.
Trade Negotiations – Some progress being made
Last quarter, we wrote about the implications of trade tensions. Unfortunately, the narrative continues. Trade tension between the U.S. and China is putting pressure on growth in both countries. If tariffs remain in place, and perhaps increase, inflation will challenge businesses and the consumer. We do expect some type of resolution in the first half of 2019; however, this remains a significant risk to our forecasts.
We expect GDP growth of 2.5% in Q4 and 2.9% for 2018. We expect GDP to slow somewhat to 2.0% – 2.4% in 2019. The government shutdown, which began late in 4Q, could also strain fragile economic growth. The longer the government is closed, the larger the impact.
We expect the Fed to increase rates to at least 2.75% in 2019. Corporate earnings should see positive growth and we expect stock prices up 8-12% in 2019.
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