November 15, 2019

The preliminary estimate of third quarter GDP growth came in at 1.9% after having 2.0% risen 2.0% in the second quarter.  For both 2019 and 2020 we anticipate 2.4% GDP growth after having risen 2.5% in 2018.  .

Consumer spending climbed by 2.9% in the third quarter after having jumped 4.6% in the second quarter.  Employment gains of 150 thousand per month are generating income which gives consumers the ability to spend.  Consumer debt is very low in relation to income.  Short-term Interest rates  are very  low.  Bond yields are at a near record low level of 1.7%.  Mortgage rates have fallen 1.3% since the beginning of the year and are now close to a record low level of 3.6%.  Real disposable income is expanding at a solid 3.0% pace.  For 2019 we anticipate growth in consumer spending of 2.9% and a 2.5% increase in 2020..

Investment spending 3.0% in the third quarter after having declined 1.0% in the second quarter.  We expect nonresidential investment to rise 0.8% in 2019 after having risen 5.9% in 2018 given an expected slowdown in GDP growth in both the U.S. and globally which has caused business leaders to become more cautious.  We expect nonresidential investment to rise 2.5% in 2020.  Given the very tight labor market we expect some firms to spend money on technology in an effort to boost production without increasing headcount.

Investment spending was essentially unchanged for 2014-2016.  It appears that the corporate tax cuts, repatriation of earnings at a favorable tax rate, and a reduction in the regulatory burden has caused business leaders confidence to open their wallets and spend on new equipment and technology.  The current quarter slowdown should prove to be temporary.  We also believe that the tight labor market is forcing employers to spend money on technology to boost productivity.  Thus, growth in investment spending should remain at least moderate.  Not only will a moderate pace of investment spending boost GDP growth in the short term, if investment continues to climb it will boost productivity growth which will, in turn, raise the economic speed limit from about 1.8% previously to 2.5% or so by the end of this decade.  At the beginning of the year we thought potential growth could climb to 2.8%, but Trump’s inconsistent trade policy and a well-entrenched expectation of slower GDP growth in the U.S. in the quarters ahead has negatively impacted business confidence.  So while productivity growth may continue to climb and boost potential growth, we have trimmed our expectation of the pickup in the pace of potential growth to 2.5% rather than 2.8%.  But even so, that compares to an estimated 1.8% potential growth rate a year or two ago.

The trade gap widened slightly in the third quarter from $980.7 billion to $986.4 billion..  This means that the trade component had no impact on  GDP growth in the third quarter.  We expect trade to have virtually  no impact on GDP growth in either 2019 or 2020.

Non-farm inventories rose $69.0 billion in the third quarter after having risen $69.4 billion in the second quarter.  Going forward we expect inventories to rise $75.0  billion per quarter through the end of next year.

Expect GDP growth of 2.4% in 2019 versus 2.5% last year.  And we expect GDP growth of 2.4% in 2020.

The inflation rate should accelerate somewhat in 2019.  With compensation rising 4.5% in the past year and productivity climbing 1.4%, unit labor costs have climbed by 3.1%.  This is the best measure of upward pressure on the inflation rate caused by tightness in the labor market.  It has caused labor costs to increase at a faster rate than the Fed’s targeted inflation rate of 2.0%.  There is also a shortage of available homes and apartments in the housing sector which is raising rents.  These two factors will put upward pressure on the inflation rate.  Also, higher prices from China in the wake of the newly-imposed tariffs may boost inflation.  However, the pickup in inflation will be kept in check as internet price shopping keeps goods prices fairly steady in 2019.  As a result, we expect the core CPI to increase 2.4% in 2019 and 2.8% in 2020.

With GDP growth at 2.4% and core inflation inching upwards.  Our forecast assumes the Fed leaves the funds rate in a range from 1.5-1.75% through the end of next year.

With GDP growth of 2.4% this year and in 2020, and the core CPI inflation edging upwards to 2.8% by the end of next year, the 10-year note yield could climb from  1.8% currently to 2.1% by the end of 2020.  Mortgage rates should rise slightly from their current level of 3.7% to 4.0% by the end of 2020.

Stephen Slifer


Charleston, SC