September 13, 2019

The preliminary estimate of second quarter GDP growth came in at 2.1% after  having risen 3.1% in the first quarter.  For the year as a whole we anticipate 2.5.% GDP growth after having risen 2.5% in 2018.  .

Consumer spending jumped 4.3% in the second quarter after having risen 1.1% in the first quarter.  However, retail sales growth jumped 0.7% in July.  Employment gains of 170 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 low and should fall farther in the second half of the year.  Bond yields are at a record low level of 1.5%.  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 3.3% pace.  For 2019 we anticipate growth in consumer spending of 2.7%.

Investment spending declined 0.6% in the second quarter after having risen 4.4% in the first quarter.  We expect nonresidential investment rise 2.8% 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.  But if we are right that GDP growth continues at a relatively robust pace in the second half of this year, we expect investment spending to return to a more rapid pace of growth.

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 2.8% or so by the end of this decade.

The trade gap widened in the second quarter by $34.7 billion  to $978.7 billion.  This means that the trade component subtracted 0.5% from  GDP growth in the second quarter.  We expect trade to have no impact on GDP growth in 2019.

Non-farm inventories rose $71.7 billion in the second quarter after having jumped by $116.0 billion in the first quarter and subtracted 0.9% from GDP growth in the second quarter.  Going forward we expect inventories to rise $75.0-$80.0  billion in each of the final two quarters of the year.

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

The inflation rate should be fairly steady in 2019.  There is a shortage of available homes and apartments in the housing sector which is raising rents.  That will put upward pressure on the inflation rate.  Also, higher prices from China in the wake of the newly-imposed tariffs will boost inflation.  However, the pickup in inflation will be limited as internet price shopping will keep goods prices steady in 2019.  At the same time, rising productivity growth will offset much of the increase in wages.  As a result, we expect the core CPI to increase 2.4% in 2019 versus 2.2% last year.  We also look for the core CPI to increase 2.4% in 2020.

With GDP growth at 2.5% and core inflation inching upwards to 2.4%, we do not believe that the Fed needs lower interest rates.  However, Fed officials in recent weeks have expressed a fear of substantially slower growth in the quarters ahead, and noted that inflation remains stubbornly below its 2.0% target.  It cut the funds rate by 0.25% on July 31 to 2.0-.2.25%.  We expect the Fed to cut the funds rate one  more time in December to 1.75-2.0% and then leave it at that rate through the end of 2020..

With another 0.25% cut in the funds rate later year and core CPI inflation edging upwards to 2.4%, long-term interest rates should rise slightly in the second half of this year and the 10-year note yield could climb slightly from  1.5% currently to 1.75% by the end of this year and 2.50% by the end of 2020.  Mortgage rates should remain at their current level of 3.6% through the end of this year and then rise to 4.2% by the end of 2020.

Stephen Slifer


Charleston, SC