Economic Update - J.P. Morgan Asset Management

Economic Update

Contributor Dr. David Kelly

Denotes updated information

Growth Icon (Grey)  Growth

The final estimate of 1Q18 economic growth came in at 2.0% q/q annualized, slightly below consensus. Monthly data on retail sales, homebuilding, durable goods, international trade and inventories point to a rebound to north of 4% growth annualized in Q2, boosting year-over-year real GDP growth to 3.0%+. We expect growth to maintain this solid pace over the next few quarters before slowing in the second half of 2019, reflecting fading fiscal stimulus and higher interest rates.

Inflation Icon (Grey)  Jobs

In June, the unemployment rate rose to 4.0% due to a 601,000 increase in the civilian labor force rather than job losses. In addition, 213,000 new payroll jobs were added and the prior two months were revised upward by 37,000 jobs. Average hourly earnings for production and non-supervisory workers rose 2.7% year-over-year , slightly down from the initially reported 2.8% for May. On balance, the employment report showed contiunued labor market strength . As strong consumer demand clashes with weak labor demographics, this should lead to wage growth acceleration, rising labor force participation and productivity growth and , eventually, slowing economic growth.

Profits Icon (Grey) Profits

The bulk of the 1Q18 earnings season is now behind us. With 501 companies having reported (99.9% of market cap), our current estimate for 1Q18 earnings is $36.68 ($29.97 ex-financials). This represents a 27.3% y/y growth rate, with strength in energy, financials, industrials, technology and telecom. Earnings surprises, a measure of by how much companies beat earnings estimates, remain at all-time highs. This, combined with strong economic fundamentals and the impact of tax reform, should support double-digit earnings growth this year.

Inflation Icon (Orange)  Inflation

June inflation data came in strong, with headline CPI up 2.9% y/y and core up 2.3% y/y. Both figures were higher than May's numbers, continuing a gradual trend of rising inflation. In addition, the Fed's preferred inflation measure, PCE, rose 2.3% y/y in May, with core PCE rising 2.0% y/y. The Fed acknowledged rising prices by increasing its inflation outlook for 2018 and 2019, which further supports the backdrop for two additional hikes this year and three next year.

Rates Icon (Grey)  Rates

As expected, the Federal Reserve raised its target for the federal funds rate to a range of 1.75%-2.00% last week. Both the language in its statement and economic projections were slightly more hawkish than in previous meetings. The committee raised both economic growth and inflation forecasts and cut the unemployment rate forecast for this year and next. In addition, the slightly more hawkish view was enough to increase the median forecast to four rate hikes in 2018 and three in 2019. With interest rates set to continue rising on the back of firmer inflation and stronger growth, bonds will face continued headwinds, and investors will need to be more selective in fixed income investing.   

Risks Icon (Grey)  Risks
  • Danger of extensive fiscal stimulus in a full employment economy could lead to overheating.
  • Elevated asset prices and valuations are pressured as rates move materially higher.
  • Weak demographics could negatively impact labor force growth in the future.
Investment Themes Icon (Grey)  Investment Themes
  • Increasing earnings growth, coupled with slowly rising interest rates, still make stocks look attractive in relative terms.
  • High yield bonds look more attractive than Treasuries, but a diversified approach to fixed income investing seems appropriate given Fed tightening.
  • International exposure is warranted given growth prospects abroad, and a weaker dollar can enhance foreign returns.
Weekly Economic Update (July 16, 2018)
Important information

Please be aware that this material is for information purposes only. Any forecasts, figures, opinions, statements of financial market trends or investment techniques and strategies expressed are, unless otherwise stated, J.P. Morgan Asset Management’s own at the date of this document. They are considered to be reliable at the time of writing, may not necessarily be all-inclusive and are not guaranteed as to accuracy. They may be subject to change without reference or notification to you. JPMorgan Asset Management Marketing Limited accepts no legal responsibility or liability for any matter or opinion expressed in this material.

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 July 16, 2018

Past performance does not guarantee future results.

Diversification does not guarantee investment returns and does not eliminate the risk of loss.

The S&P 500 Index is widely regarded as the best single gauge of the U.S. equities market. This world-renowned index includes a representative sample of 500 leading companies in leading industries of the U.S. economy. Although the S&P 500 Index focuses on the large-cap segment of the market, with approximately 75% coverage of U.S. equities, it is also an ideal proxy for the total market. An investor cannot invest directly in an index. Indexes are unmanaged.

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