Economic Update - J.P. Morgan Asset Management

Economic Update

Contributor Dr. David Kelly

Denotes updated information

Growth Icon (Orange)  Growth

The second estimate of 1Q19 U.S. real GDP growth came in at 3.1% q/q saar, slightly below the initial estimate of 3.2%, with an inventory build-up and net exports still providing a big temporary boost during the quarter. Growth has downshifted in the second quarter, although consumer spending remains a bright spot for the economy. May retail sales rose 0.5% m/m and April figures were revised upwards significantly, while consumer confidence remains at solid levels. Weakness in the economy remains more concentrated in the manufacturing sector and in business investment, likely due to trade policy uncertainty.

Jobs Icon (Grey)  Jobs

Nonfarm payrolls increased by 75,000 in May, below consensus expectations, and jobs gains in March and April were revised down by 75,000 jobs. However, the unemployment rate remained at 3.6%, the lowest rate since December 1969 ,and the labor force participation rate also remained the same at 62.8%. Wages were slightly weaker than expected, growing 0.2% m/m and 3.1% y/y for all workers (0.3% m/m and 3.4% y/y for production and non-supervisory workers). While the pace of job growth may have slowed, the labor market still remains tight.

Profits Icon (Grey) Profits

1Q19 earnings season has wrapped up, with 462 companies having reported (94.3% of market cap). Our current estimate for 1Q19 earnings is $38.17, rising 4.5% y/y, with negative analyst estimates proving to be too pessimistic. 75% of companies have beaten on earnings, while 44% have beaten on revenue. Financial and health care sectors led with positive earnings growth, while energy struggled the most. We anticipate low to mid single digit earnings growth for 2019 as a whole.

Inflation Icon (Orange)  Inflation

Inflationary pressures remained subdued in May, with the headline and core CPI both increasing 0.1% m/m and 1.8% y/y and 2.0% y/y, respectively. These figures suggest that the May PCE figures will decline a bit from their April prints of 1.5% y/y for headline and 1.6% y/y for core. Should oil prices remain low, the consumption deflator should have a hard time rising to 2% y/y in 2019 or 2020.

Rates Icon (Grey)  Rates

The Federal Reserve maintained its target range for the federal funds rate at 2.25%-2.50% at its May meeting. However, the FOMC did cut the interest on excess reserves (IOER) rate to 2.35% from 2.40% for technical reasons. Since then, comments from Fed officials suggest they are willing to ease monetary policy as a result of a slowing economy due to trade tensions. The futures market is currently pricing in multiple rate cuts this year, and we expect the Fed to cut rates two, and possibly three, times this year starting as early as July.

Risks Icon (Grey)  Risks
  • Unresolved trade tensions may exacerbate a slowdown in global growth.
  • Corporate debt is rising, and declining in quality.
  • Federal debt poses a long-term risk.
Investment Themes Icon (Grey)  Investment Themes
  • Risk assets have reasonable valuations and may have room to run heading toward the end of this cycle.
  • Credit and short duration tend to perform well late cycle, while core fixed income protects heading into a downturn.
  • Long-term growth prospects and cheap absolute and relative valuations support international equities.
Weekly Economic Update (June 17, 2019)
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The value of investments and the income from them can fall as well as rise and investors may not get back the full amount invested. Past performance is not a guide to the future.

Data are as of June 17, 2019

Past performance does not guarantee future results.

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© JPMorgan Chase & Co., June 2019