WASHINGTON — The U.S. economy grew at a healthy 3.1% rate in the first three months of this year, but signs are mounting that growth has slowed sharply in the current quarter amid slower global growth and a confidence-shaking trade battle between the United States and China.
The gain in the gross domestic product, the broadest measure of economic health, was unchanged from an estimate made a month ago, the Commerce Department reported Thursday. However, the components of growth shifted slightly with stronger business investment and consumer spending slowing more than previously estimated.
Economists believe growth has slowed sharply in the current April-June quarter to around 2%. They expect similar meagre gains for the rest of the year, a forecast that runs counter to the Trump administration’s expectations for strong growth above 3%.
The 3.1% growth in the first quarter marked a rebound from a 2.2% growth rate in the fourth quarter of last year. But it was slower than a sizzling increase of 4.2% in the second quarter and a solid increase of 3.4% in the third quarter last year. For the entire year, GDP grew 3.9%, the best annual gain since 2015.
Last year’s strength was powered by the implementation of a $1.5 trillion tax cut, President Donald Trump’s signature domestic achievement, and billions of dollars in increased government spending on the military and domestic programs Congress approved in early 2018.
However, the impact of the tax cuts and the higher government spending are expected to fade this year, leaving the economy growing very close to the 2.2% average seen over the 10 years of the current expansion, which will become the longest in U.S. history next month.
Economists at Capital Economics are forecasting that growth will slow to 2.3% this year and even further to 1.2% in 2020 before rebounding a bit to 2% growth in 2021.
Paul Ashworth, the firm’s chief U.S. economist, said that the slowdown from the fading of the tax cuts and increased government spending was being “exacerbated by a dramatic slowdown in other parts of the global economy,” in particular Europe and Japan. Trump’s “trade war with China is also sapping confidence,” Ashworth said.
The Trump administration disputes forecasts of a U.S. slowdown, believing that its economic policies will lift growth to levels of 3% or better over the next six years.
Trump, who is counting on a strong economy as he campaigns for re-election next year, has pushed the Federal Reserve to immediately start cutting interest rates to undo what he sees as the damage from four unnecessary Fed rate hikes last year.
At its meeting last week, the Fed did signal that it was prepared to cut rates if needed to protect the economy from a growing trade dispute between the United States and China.
Trump is scheduled to meet Saturday with Chinese President Xi Jinping at a Group of 20 major nations summit in Japan to see if a way can be found to restart trade negotiations between the world’s two biggest economies.
The trade tensions have increased uncertainty over what higher tariffs on Chinese imports will do to the U.S. economy, resulting in declines in manufacturing activity and a drop in consumer confidence.
Mark Zandi, chief economist at Moody’s Analytics, said if this week’s talks don’t achieve at least a truce in the trade war and Trump carries through with his threats to expand his existing tariffs on $250 billion in Chinese goods to cover virtually all of Chinese imports, that could be enough to trigger a full-blown recession.
“I think we are on the razor’s edge here,” Zandi said. “The real threat now is an expanding trade war which would push growth below potential and result in unemployment starting to rise.”
In the first quarter, consumer spending, which accounts for 70% of economic activity, slowed to a small 0.9% rate of gain, down from a previous estimate of 1.9%. This downward revision was offset by several factors including stronger spending by businesses on investment in such areas as computer software.
While economists believe consumer spending will rebound a bit in the second quarter, other factors that contributed about half of the first quarter growth — a big improvement in the trade deficit and a big rise in business restocking — were not expected to be repeated in the second quarter, resulting in lower overall growth.
North America economy is the most resilient against climate change
By 2050, climate change will shrink the US economy by 1.1%, according to a report from the Economist Intelligence Unit. The same holds true for North America’s economy as a whole, according to the report. Natural catastrophes, such as wildfires and droughts, for example, will continue to be a drag on the economy with worsening climate conditions.
Still, the United States is comparably well off. Western Europe’s GDP growth stands to drop 1.7% over the next 30 years, putting it in second place behind North America.
Preparation for climate change is higher in these regions, which is making them more resilient. Wealthier and more developed economies have it easier when it comes to battling the onslaught of climate challenges. But being rich is only part of the deal. The quality of government institutions also matters.
Institutions must be able to adapt to change and put effective mitigation policies in place to remain intact in the face of climate challenges. But being rich is only part of the deal The quality of government institutions also matters.
Poland sees bigger state role in economy
By Alan Charlish and Alicja Ptak
WARSAW (Reuters) – Poland’s prime minister set out plans on Tuesday to strengthen the state’s role in the economy and deepen an overhaul of the justice system that has put Warsaw on a collision course with its European Union partners.
Mateusz Morawiecki said the ruling Law and Justice (PiS) party would continue increasing welfare spending and the share of Polish capital in domestic companies, underlining its break with the free-market reforms of liberal governments before it.
“Neoliberals have fueled a sense of confusion in our value system. Many people were led to believe that the state is a ball and chain,” he said in a policy speech to parliament after an Oct. 13 election that gave PiS four more years in power. “Extremes are not good. We are building a normal state.”
Morawiecki spoke repeatedly of a return to “normality”, referring both to PiS’s economic policies and its conservative vision of the traditional family which has won over voters but has been criticized by opponents for encouraging homophobia.
He promised new welfare programs to help families with at least three children and the elderly.
In separate comments, PiS leader Jaroslaw Kaczynski said: “Our society… must be based on the Polish family, the family in its traditional sense. A family which takes the form of a relationship between a man and a woman.”
Opposition lawmakers criticized PiS’s vision of normality.
“The desire for normality means the rule of law and economic prudence, and you break those principles day after day,” said Grzegorz Schetyna, leader of the largest opposition party, Civic Platform.
Morawiecki’s government won a vote of confidence in a late-evening session on Tuesday, with 237 deputies out of 454 lending him their support.
CONCERNS OVER RULE OF LAW
Since returning to power in 2015, PiS has introduced changes to how courts are run and altered some of the rules governing the Constitutional Tribunal and the Supreme Court.
The European Commission, the EU executive, responded by launching legal action over reforms which it says threaten the rule of law and the independence of the judiciary.
The European Court of Justice ruled on Tuesday that it was up to Poland’s Supreme Court to decide on the independence of the Disciplinary Chamber and the National Judiciary Council, offering some criteria on adherence to EU law.
Morawiecki gave no details of the next steps PiS plans to take in its reforms of the judiciary. The party says further reforms are intended to make the court system more efficient but opponents say the reforms made so far have politicized it.
PiS has said it will keep a balanced budget in 2020, benefiting from one-off revenues and fast economic growth, although some economists say such plans are too ambitious at a time when the European economy is slowing down.
(Reporting by Agnieszka Barteczko, Alan Charlish, Joanna Plucinska, Anna Koper, Pawel Florkiewicz and Alicja Ptak; Editing by Timothy Heritage)
Cyclical Stocks That Will Lead as Economy Rebounds
Cyclical stocks are beating the market, and should continue to outperform in 2020 as the U.S. economy rebounds, Goldman Sachs forecasts. Since late August, the S&P 500 is up by 9%, cyclical stocks have advanced by 12%, but defensive stocks have lagged with an 8% gain, per Goldman’s current US Weekly Kickstart report.
“The relative performance of Cyclicals vs. Defensives suggests the equity market is anticipating an acceleration in US economic growth during the coming months,” Goldman says. “Investors who want to capture further cyclical upside can improve risk-reward by narrowing their focus to select cyclical stocks,” they add.
Among the 24 stocks that passed Goldman’s Cyclically-Attractive Risk-Reward screen are these 10, which are expected to post a sharp acceleration in their EPS growth in 2020 compared to the previous year. Goldman for example, forecasts that CommScope Holdings Co. Inc. (COMM) will post 2020 earnings growth that’s 17 percentage points (pp) higher than this year. Other companies include Lincoln National Corp. (LNC), 79 pp higher, Harley-Davidson Inc. (HOG), 38 pp, Urban Outfitters Inc. (URBN), 30 pp, Kohl’s Corp. (KSS), 11 pp, 3M Co. (MMM), 17 pp, MetLife Inc. (MET), 12 pp, Lear Corp. (LEA), 42 pp, Prosperity Bancshares Inc. (PB), 35 pp, and Evercore Inc. (EVR), 18 pp.
- Goldman Sachs forecasts accelerating U.S. GDP growth in 2020.
- They identified cheap cyclical stocks with significant upside potential.
- These stocks are highly sensitive to economic data surprises.
Significance For Investors
Goldman screened the Russell 1000 Index for stocks with high historical share price sensitivity to economic data surprises, but whose current valuations, as measured by forward P/E ratios, are significantly below both their own 5-year averages and the average for the index. Goldman excluded energy stocks, based on their forecast of flat oil prices, and semiconductor stocks, given that shipments have recovered to trend. Among the stocks listed above, Urban Outfitters and Prosperity Bancshares are the most economically-sensitive.
The median stock in the basket has a forward P/E of 11 times projected earnings over the next 12 months, versus a 5-year average of 14 times, and a current figure of 19 times for the median Russell 1000 stock. While the median stock in the basket has a projected EPS growth rate in 2020 of 7%, versus 8% for the median Russell 1000 stock, its growth rate is forecast to improve by 9 percentage points from 2019 to 2020, versus an improvement of only 3 percentage points for the median stock in the index.
Goldman sees signs that the U.S. economy is rebounding, which should give cyclical stocks additional upside. They cite recent positives in non-farm payroll growth, home sales, retail sales, the ISM Manufacturing Index, and the ISM Non-Manufacturing Index. They forecast U.S real GDP to grow by 2.1% in 2020, versus the consensus projection of 1.8%.
Motorcycle manufacturer Harley-Davidson appears to have huge upside, according to Goldman’s analysis. It has a forward P/E of 11 times, slightly below its 5-year average of 12 times. The consensus calls for 21% EPS growth in 2020, up 38 percentage points from 2019. While Q3 2019 revenue was down by 5% year-over-year (YOY) and shipments dropped by 6%, Harley beat estimates and the stock surged, Barron’s reported. About 40% of total bikes sold were overseas, with sales in Asia up by nearly 9%.
Insurance company MetLife has a forward P/E of 8 times, slightly below its 5-year average. The consensus calls for 9% EPS growth in 2020, up 12 percentage points from 2019. Revenue and EPS in Q3 2019 were up 15% and 161%, respectively. Revenues from premiums rose by 5.3%, and total revenues beat the consensus estimate by 14%, per The Wall Street Journal. However, more than half the beat was due to a gain on derivatives contracts used to hedge against lower interest rates.
To be sure, many of these companies have posted poor results in the past few years. And Goldman’s bullish view depends on an imminent economic rebound seen by few other strategists on Wall Street. If Goldman is wrong and the economy stalls or goes south, these stocks will follow close behind.
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