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December Monthly Dashboard: Trend growth and (perhaps) reduced downside risks heading into 2020

  • illustration of current scorecard dial
  • illustration of future scorecard dial

Monthly Review (Page 3)

Despite slowing from last year’s faster pace, real GDP growth has stabilized at annual rates around 2.0 percent over the past two quarters (and the Atlanta Fed’s GDP Now estimate for the fourth quarter is also around 2.0 percent). This slower (but near trend) pace of growth has come primarily from trade and tariff uncertainty, and it has offset many of the positives from tax cuts and regulatory changes. Manufacturing and agriculture (the sectors most exposed to trade) continue to contract modestly while the service sector expansion has slowed. But the strong job market and rising incomes in response to ultra-low unemployment continue to drive consumer spending. The consumer sector has helped to partially offset the drag from trade-war-induced weakness. After cutting rates at each of the prior three FOMC meetings, the Fed stood pat in December and signaled that it expects to keep policy steady for a while, unless inflation/economic data shift significantly to the downside (prompting further easing) or to the upside (restarting rate tightening). Equity markets remained on an uptrend as geopolitical risks have receded and liquidity is still plentiful with three Fed easings in 2019, climbing to all-time highs.

Outlook (Page 4)

Recent events (the normalization of the yield curve, a preliminary phase one trade agreement between the U.S. and the P.R.C., the likely passage of the USMCA trade agreement to replace NAFTA, a budget agreement that eliminates a near-term U.S. government shutdown, and the victory of the Conservatives in the U.K. that gives more Brexit clarity) suggest that the odds of downside scenarios have declined in the near-term. Still, there is much that is unknown with the trade deals, and they are not yet completed — with more trade negotiations with China to come in 2020. Moreover, specific provisions (once known and agreed to) may not be achieved. As the year progresses, financial markets and the economy will concentrate on the U.S. elections — likely increasing geopolitical uncertainty again, with potentially detrimental impacts to both. Despite this, the state of the consumer is positive and monetary policy appears to be on hold for at least the next year — keeping interest rates at low levels. Taken altogether, these factors suggest that the record long economic expansion is likely to continue for a while. Risks to the outlook remain, but for now they appear be less impactful then they were a couple of months ago.

Go deeper with the full December dashboard linked below.

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