Economic Update - J.P. Morgan Asset Management

Economic Update

Contributor Dr. David Kelly

Denotes updated information

Growth Icon (Grey)  Growth

The final estimate of 4Q18 U.S. real GDP growth was revised down from 2.6% to 2.2% q/q saar. Consumption, government spending and business fixed investment were all revised down slightly, but partially offset by lower imports. This deceleration was echoed in last week’s mixed data: Durable goods orders contracted sharply given a drop in aircraft orders, and retail sales were down -0.2%. Manufacturing PMI continued to slow in March, but still remains in expansionary territory at 52.4. However, autos sales for March were an impressive 17.5 million, and construction spending boosted the outlook for 1Q19 GDP growth.

Jobs Icon (Orange)  Jobs

Job openings fell by a substantial 538,000 in February, but this weakness is inconsistent with an otherwise strong labor market, so we will watch next month’s JOLTS report to see if it could have been an anomaly. Nonfarm payroll gains rebounded to 196,000 in March, and the unemployment rate held steady at 3.8%. Wages grew by 3.3% for production and non-supervisory workers, their weakest year-over-year gain since last October, signaling slower growth in wages. Although the pace of job gains and improving employment is decelerating, jobless claims fell below 200,000 last week, indicating that the labor market is still tightening.

Profits Icon (Orange) Profits

1Q19 earnings season kicked off last week, with 25 companies having reported (4.6% of market cap). Our current estimate for 1Q19 earnings is $36.42, declining -0.3% y/y. So far, 84% of companies have beaten on earnings, while 20% have beaten on revenue. While this is only representative of a small sample of companies so far, slower global growth, a stronger USD, margins pressures and fading effects from tax reform will weigh on earnings this quarter. Revisions have moved down sharply since the beginning of the year, but we still anticipate low-to-mid single digit earnings growth for 2019 as a whole.

Inflation Icon (Orange)  Inflation

Headline CPI increased by a more-than-expected 0.4% m/m in March, primarily due to rising energy prices, and rose 1.9% y/y. Core CPI remained steady, rising a modest 0.1% m/m and 2.0% y/y. Headline PCE fell to 1.4% y/y, as did core PCE to 1.8% y/y, in January, both below the Fed’s 2% target. Despite a recent rebound in energy prices, we believe core inflation is unlikely to accelerate meaningfully in the months ahead.

Rates Icon (Grey)  Rates

The Federal Reserve maintained its target range for the federal funds rate at 2.25%-2.50% at its March meeting. It provided clarity on balance sheet normalization, first slowing the pace of asset reduction, and then concluding reduction by end of September, aiming to hold mostly Treasuries. Its economic projections showed real GDP growth slowing and inflation at or below its 2% target, yet Chairman Powell was positive about the health of the U.S. economy. Still, the FOMC indicated zero rate hikes in 2019, and one in 2020, striking a decidedly dovish tone.

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 (April 15, 2019)
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Data are as of April 15, 2019

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