Economic Update - J.P. Morgan Asset Management
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Economic Update

Contributor Dr. David Kelly

Denotes updated information

Growth Icon (Grey)  Growth

The third estimate for 2Q19 real GDP growth came in at 2.0%, driven by consumption and government spending that were partially offset by inventories, net exports and housing. Looking ahead 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. Weakness in economic activity is evident in the data out last week; the ISM manufacturing PMI dropped to 47.8, the lowest since 2009, and ISM services dropped to 52.6 from 56.4.

Jobs Icon (Grey)  Jobs

The unemployment rate fell to a fresh 50-year low of 3.5% in September, while the labor force participate rate remained steady at 63.2%. Nonfarm payrolls increased by 136,000 in September, below expectations of 150,000. This appears to be roughly in line with August, except September only added 1,000 temporary 2020 Census workers, while last month 25,000 Census workers were added, resulting in more permanent job gains in September. Wages disappointed, flat on the month and rising just 2.9% y/y for all workers. With fewer unemployed people, fewer discouraged workers and fewer people joining the labor force, the labor supply is constrained, which should be a headwind for long term growth.

Profits Icon (Orange) Profits

With 22 companies having reported (4.9% of market cap), our current estimate for 3Q 2019 is $40.25, and EPS growth is at -2.7% y/y. Although consensus analyst estimates call for negative earnings growth, given the average earnings surprise since 2012, earnings growth could be modestly positive. Headwinds to earnings include slower global growth, lower oil prices and a stronger dollar, plus comparisons to a robust 3Q18 pose a challenge earnings growth. Margins will remain under pressure from rising wages, higher input costs and some tariff impacts. However, buybacks look set to add about 2%-points to the overall level of earnings growth, providing a partial offset to the decline in margins. From a sector standpoint, healthcare is set to deliver the strongest results, while energy may deliver the weakest due to lower oil prices.

Inflation Icon (Orange)Inflation

Headline CPI inflation was flat m/m in September, and rose 1.7% y/y, held down by a 4.7% y/y decrease in energy. Core CPI increased 0.1% m/m and 2.4% y/y. The August PCE deflator remained relatively stable, with headline PCE flat m/m, and up 1.4% y/y. Core PCE was up 0.1% m/m, and increased 1.8% y/y with a revision upwards for the prior month to 1.7% y/y. Firming inflation pressures erode the rationale for further rate cuts by the Federal Reserve.

Rates Icon (Grey)  Rates

The Federal Reserve cut its target range for the federal funds rate by 25bps to 1.75%-2.00% at its September meeting. The rationale for the cut was global developments and muted U.S. inflation. However, there were conflicting messages from a dovish statement and a more hawkish press conference as to whether these cuts would continue. Chair Powell seemed to reaffirm this cut was still part of a “mid-cycle adjustment” rather than the beginning of a longer rate cutting cycle, but left it up to the economic environment going forward to determine the future path of rates. We anticipate one more cut this year.

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 (October 14, 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 October 14, 2019

Past performance does not guarantee future results.

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

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© JPMorgan Chase & Co., October 2019