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US Economic Performance and Risks in 2019

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Don't kill the golden goose
The American economy has shown no evident signs of a lapse this year. On the consumption side the job market is steadily creating more jobs than can be filled. Slowly gathering wage increases coupled with low inflation have given the consumer a rare period of modestly increasing purchasing power. This should continue into next year as the labor market shows no sign of retreat.

The consumer is the heart and soul of the American economy. As long as spending continues to be strong most other effects on the economy are secondary.   Readings from the University of Michigan and the Conference Board indicate that sentiment remains buoyant. Low inflation and stable, particularly with the soon to retreat gasoline prices, will add to the sense of economic well-being. 

Judging from the relative decline in GDP from the second quarter's 4.2% to the fourth's 2.7% (estimated) and the fact that no further tax reform or stimulus will be forthcoming from a Democratic House and until the China trade dispute is settled, GDP will likely slip into the 2.5% to 3.0% range.  After the trade issue is disposed of GDP could return to 3.0% to 3.5%.

Once the old year is gone and with it the equity markets' obsession with annual performance metrics, attention will turn to the still vibrant state of the US economy. As with GDP, when the China trade issue is removed as a source of worry, equities should regain much of the year end losses.  

The anticipated Fed relaxation in its pace of rate increases, with two now likely next year,  should help the housing market to revive.  Housing sales are suffering an emotional hangover from having been the beneficiary of historically low rates for the past five years. The current rate on the 30-year mortgage is low by past standards though the rise in home prices has made purchases expensive for many people.

Business spending responds  to demands from the consumer sector. The second and third quarters had some of the strongest investment since the recession. Here also the consumer will set the pace.  Sentiment indexes remain strong.  Purchasing managers’ indexes in manufacturing and services are close to their record highs as is the small business sentiment index.


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