Economic Update - J.P. Morgan Asset Management

Economic Update

Contributor Dr. David Kelly

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Growth Icon (Orange)  Growth

The second estimate for 2Q19 real GDP growth came in at 2.0%, slightly below the first estimate of 2.1%. There were downward revisions to government spending, exports, inventories and housing that were partially offset by an upward revision to consumption. 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. Retail sales for August were up a solid 0.4% m/m, but retail sales exautos were flat with downward revisions to the prior two months, reflecting a slight downshift in consumer momentum.

Jobs Icon (Grey)  Jobs

Nonfarm payrolls increased by 130,000 in August, below expectations of 150,000. However, this included 25,000 temporary 2020 Census workers, downward revisions of 20,000 to the prior two months, and given recent preliminary annual benchmark revisions of 42,000 fewer jobs per month (March 2018-2019), we could see further downward revisions to 2019 gains early next year. The unemployment rate was steady at 3.7%, and the labor force participation rate ticked up to 63.2%, as 571,000 workers joined the labor force. Wages grew at 0.4% m/m and 3.2% y/y for all workers (0.5% m/m and 3.5% y/y for production and non-supervisory workers). Job gains likely result from pent-up demand, but given slower growth and weaker business sentiment, job gains are likely to decelerate further in the coming months.

Profits Icon (Grey) Profits

With 482 companies having reported (98.2% of market cap), our current estimate for 2Q 2019 is $40.55, and EPS growth is at 4.9% 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 (Orange) Inflation

Headline inflation increased 0.1% m/m in August, and 1.7% y/y, held down by a 1.9% decrease in energy. However, core CPI increased 0.3% m/m for the third consecutive month, with increases in medical care, shelter, recreation, used cars and trucks, and airfare. On a year-over-year basis, core CPI rose 2.4%, the highest since 2008. However, the July PCE deflator was softer than expected, increasing 0.2% m/m for both headline and core measures, bringing the year-over-year increases to 1.4% and 1.6%, respectively, still well below the Fed’s 2% target. While markets are still pricing in a Fed rate cut this week, firming inflation pressures erode the rationale for further cuts.

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 (September 16, 2019)
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Data are as of September 16, 2019

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