Economic Update - J.P. Morgan Asset Management

Economic Update

Contributor Dr. David Kelly

Denotes updated information

Growth Icon (Orange)  Growth

The third and final estimate of 3Q U.S. GDP growth dipped 0.1% from the prior estimate to 3.4% q/q saar, decelerating from the 4.2% pace in 2Q. The estimate was revised down due to weaker personal consumption expenditures (PCE) and exports, although inventories were revised up. Data reports postponed due to the government shutdown have started being released, with light vehicle sales for December ending strongly at 17.5 million, but faltering in January at 16.6 million.

Jobs Icon (Grey)  Jobs

Nonfarm payrolls increased by 304,000 jobs in January, well above expectations of under 200,000. The unemployment rate rose to 4.0%, likely due to effects of the recent government shutdown. Wage growth was steady, increasing 0.1% m/m, or a healthy 3.2% y/y, echoed by the quarterly employment cost index, which rose 0.7%. Gains in both payrolls and wages should bolster consumer spending and thus overall economic growth in 2019. However, employment is a lagging indicator, so impressive gains we’ve see recently likely reflect the acceleration in growth from 2Q and 3Q of 2018. Therefore, slowing economic growth portends weaker job gains ahead.

Profits Icon (Orange) Profits

With 325 companies having reported (78.1% of market cap), our current estimate for 4Q18 earnings is $38.15 ($31.49 ex-financials), and 70% of companies have beaten on earnings, while 47% have beaten on revenue. As earnings season draws to a close, profit growth has slowed to approximately 15% y/y in 4Q due to lower margins, higher input costs, a stronger dollar and slower global growth. The energy, financial, materials and healthcare sectors have been the leaders this season, underscoring a preference going forward for cyclical value.

Inflation Icon (Grey)  Inflation

Headline CPI fell 0.1% in December after the decline in oil prices brought the energy component down 3.5% m/m. Core CPI remained stable, rising 0.2% m/m and 2.2% y/y, in line with November’s reading. Headline PCE, the Fed's preferred inflation measure, fell to 1.8% y/y in November and core PCE fell to 1.9%, the first time since February that both numbers are below 2%. Overall, inflation continues to be stable and should remain near or slightly below 2% in 2019.

Rates Icon (Grey)  Rates

The Federal Reserve maintained its target range for the federal funds rate at 2.25%-2.50% at its January meeting. The Fed struck a decidedly dovish tone in the statement and press conference, removing the reference to “further gradual increases” and instead mentioning “adjustments,” which could indicate hikes or cuts. On balance sheet normalization, comments remained ambiguous. Given this, we expect zero rate hikes in 2019, and for the Fed to stay the course with balance sheet normalization for the time being.

Risks Icon (Grey)  Risks
  • The government shutdown may diminish 1Q19 U.S. GDP growth.
  • Trade tensions may exacerbate a slowdown in global growth.
  • The Federal Reserve may tighten monetary policy too aggressively.
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 (February 11, 2019)
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Data are as of February 11, 2019

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