Economic Update - J.P. Morgan Asset Management

Economic Update

Contributor Dr. David Kelly

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Growth Icon (Orange)  Growth

The first estimate for 2Q19 real GDP growth came in at 2.1%, a little stronger than the consensus expectation of 1.9%. Real government spending and real consumer spending were positive contributors to growth, while a decline in business fixed investment, slower inventory growth and weaker trade detracted. Looking forward to the third quarter, inventory growth should decline further while consumer spending and government spending will likely grow at a more moderate pace and trade numbers should continue to be weak. Last week, the global service PMI moved up to 52.5, still in expansionary territory despite the manufacturing PMI dropping to 49.3 earlier this month. Similarly, the U.S. service PMI came in at 53.0 vs. manufacturing PMI at 50.4. Because services dominate the economy relative to manufacturing, this is a positive for economic activity.

Jobs Icon (Grey)  Jobs

Nonfarm payrolls increased by 164,000 in July, in line with consensus expectations; however, revisions to prior months brought job gains down by 41,000. The unemployment rate was steady at 3.7%, and the labor force participation rate ticked up to 63.0%, as 370,000 workers joined the labor force. Wages grew at 0.3% m/m and 3.2% y/y for all workers (0.2% m/m and 3.3% y/y for production and non-supervisory workers). While a steady labor market provides some countervailing strength to otherwise deteriorating economic data, it is important to note that the job market is a lagging economic indicator and could begin to slow in the coming months.

Profits Icon (Orange) Profits

With 434 companies having reported (91.3% of market cap), our current estimate for 2Q 2019 is $40.28, and EPS growth is at 4.2% y/y. Thus far, 74% of companies have beaten on earnings, while 42% have beaten on revenue. While margin growth is expected to contract slightly, our current estimates show margins remaining healthy at 11.5%. Slower global growth, lower oil prices, a stronger USD, margin pressures and fading effects from tax reform will continue to weigh on earnings this quarter. We anticipate low to mid single digit earnings growth for 2019 as a whole.

Inflation Icon (Grey)  Inflation

The June headline PCE deflator only nudged higher by 0.1% m/m, and the core PCE deflator rose 0.2% m/m, bringing the year-over-year increases to 1.4% and 1.6%, respectively, still well below the Fed’s 2% target. Core CPI was up 0.3% m/m in June, the largest increase since January 2018, driven by apparel and housing, bringing the y/y increase to 2.1%. Headline CPI only inched up 0.1% m/m, for a lower 1.6% y/y increase, as energy continued to decline. Persistently low inflation may continue to provide the Fed with a rationale for additional rate cuts this year.

Rates Icon (Grey)  Rates

The Federal Reserve cut its target range for the federal funds rate by 25bps to 2.00%-2.25% at its July meeting, and will end its balance sheet reduction two months early. The rationale for the cut was slowing global growth and low U.S. inflation. However, Chair Powell explained the rate move as a “mid-cycle adjustment” rather than the beginning of a longer rate cutting cycle, striking a more hawkish tone than its dovish action. We expect at least one, possibly two more cuts this year, but anticipate the Fed may be challenged to stop there.

Risks Icon (Grey)  Risks
  • Unresolved trade tensions may exacerbate a slowdown in global growth.
  • An escalation in tensions between the U.S. and Iran could cause an oil shock.
  • Corporate debt is rising, and declining in quality.
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 (August 12, 2019)
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Data are as of August 12, 2019

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