The numbers: The U.S. economy grew slightly faster than 2% in the final three months of 2019, aided by a temporary plunge in imports and a resurgent housing market. The modest rate of growth likely foreshadows what lies ahead.
Gross domestic product, the official scorecard for the economy, expanded at a 2.1% clip in the fourth quarter. Analysts polled by MarketWatch had forecast a 1.9% increase.
The U.S. got off to sizzling start last year as GDP reached 3.1% in the first quarter, but growth tapered off to the postrecession average of around 2% after the trade war with China intensified and business investment slumped.
The government’s snapshot of the economy toward the end of last year offers a glimpse of what’s in store for 2020. Consumer spending has fueled a record expansion now in its 11th year even as businesses have cut back on investment and production. Those trends are likely to persist.
What happened: Consumer spending, the lifeblood of the economy, rose at a 1.8% pace in the fourth quarter. While that’s a big dropoff from gains of 3.2% and 4.6% in the spring and summer, it’s still more than enough to keep the economy on a stable path of growth.
Households have spent generously over the past year as unemployment fell to a 50-year low of 3.5%. Wages are rising at a healthy 3% rate and layoffs are at the lowest level in decades.
The steady pulse of consumer spending, meanwhile, has led to higher sales for businesses and allowed them to maintain current staffing even as the economy has slowed.
The economy got an even bigger boost — though likely a short-lived one — from a sharp decline in the U.S. trade deficit. Exports climbed 1.4% while imports sank 8.7% in the fourth quarter. That’s the biggest decline since the end of the 2007-09 2007-09 recession.
The drop in imports stemmed mostly from an increase in U.S. tariffs on Chinese goods last September. Companies rushed to beat the tariff increases, then cut back on import orders to wait to see if the Trump administration rolled back the punitive measures.
An interim deal with China that’s eased trade tensions rolled back some of the tariffs and economists expect imports to snap back in the first quarter. The first sign of a rebound came in December.
On the other side of the ledger, weak business investment held the economy back again.
Investment in equipment declined almost 3% and spending on structures like oil rigs tumbled 10% in the fourth quarter. Trade tensions and Boeing’s ongoing troubles with its grounded 737 Max plane have exacerbated the slowdown in investment.
The level of inventories was another drag. The change in the value of unsold goods rose just $6.5 billion vs. a $69.4 billion increase in the prior quarter, lopping about 1.1 percentage points off final GDP.
Inventory growth sank in large part due to a strike at General Motors in the fall that crimped auto production. Inventories are likely to rebound in the first quarter.
The one bright spot in the commercial segment of the economy has been housing. Builders stepped up investment after the Federal Reserve cut interest rates and demand for housing rose. Housing outlays rose 5.8% in the fourth quarter.
Government spending, meanwhile, increased 2.7% in the fourth quarter, largely reflecting an increase in outlays on ships, planes, missile systems and other military hardware.
Inflation, as measured by the Fed’s preferred PCE price index, was little changed at a 1.6% rate.
Big picture: The economy is growing fast enough to ward off the threat of recession, but there’s no explosion in growth coming.
The so-called Phase One trade deal with China has put the dispute between the world’s two largest economies on the back burner, but ongoing tensions are likely to keep businesses in the sidelines. The new threat from the coronavirus and 2020 U.S. presidential elections are also giving business leaders angst.
Most economists predict the U.S. will grow less than 2% in 2020, compared with 2.3% in 2019 and 2.9% in 2018.
What they are saying? “The 2.1% headline GDP print gives the optical illusion of an economy chugging along at a moderate 2% clip at the end of 2019, but the composition of growth reveals a softer picture,” economists at Oxford Economics told clients in a note.
“The bottom line is that the economy appears to have successfully sidestepped a more pronounced slowdown that sent ripples of fear through the market last year,” said Jim Baird, chief investment officer at Plante Moran Financial Advisors. “Certainly, the economy isn’t firing on all cylinders, but it also doesn’t appear to be at risk of stalling out either.”
Market reaction:The Dow Jones Industrial Average
and S&P 500
declined in Thursday trades. Stocks had been trading at records until an outbreak of the deadly coronavirus in China put financial markets on edge.
The 10-year Treasury yield
slipped to 1.57% as investors sought the perceived safety of government bonds.
#div-gpt-ad-1569967089584-0 > div > iframe width: 100% !important; min-width: 300px; max-width: 800px;
French Economy Clings On to Growth as Energy Concerns Mount
(Bloomberg) — The French economy looks set to make it through the end of the year without a decline in output, even as business leaders are concerned about the increasing impact of surging energy prices on their activity.
A monthly survey of 8,500 companies by the Bank of France published on Thursday indicated a 0.1% expansion in the fourth quarter after activity improved more than anticipated in all sectors in November. Services are expected to grow again this month, while industry stabilizes and construction declines.
“Despite a very uncertain environment marked by a convergence of large-scale external shocks, activity is still resisting overall,” the central bank said. Its longer-term projections published in September assumed no growth in the final three months of 2022.
Read more: Bank of France’s Gloomy Outlook Casts Doubt on Macron’s Plans
The assessment is relatively upbeat compared with an average forecast from analysts for France to finish the year with a 0.2% quarterly contraction. S&P Global’s purchasing managers’ index for November indicates a recession is already underway in the 19-nation euro area.
The Bank of France’s survey also showed supply difficulties eased last month, reaching the lowest level in industry and construction since it started gauging frictions in May 2021.
Still, the central bank’s measure of the impact of surging energy prices points to greater headwinds early next year. Of the business leaders surveyed, 24% said the energy crisis is already having a significant impact on activity, while 35% see a hit in the next three months.
China’s Economy Is In for a Bumpy Ride as Covid Zero Comes to an End
(Bloomberg) — Three years after the first case of Covid-19 was reported in Wuhan, Chinese policymakers must now grapple with how to live with the virus while keeping the economy growing fast enough to stave off public anger.
With the Covid Zero policy being rapidly dismantled, the threat of economic disruption remains high. Infections are likely to surge, forcing workers to stay home, businesses may run out of supplies, restaurants could be emptied of customers and hospitals will fill up. Even though there’s optimism the economy will recover as China opens up to the rest of the world, the next six months could be particularly volatile.
Goldman Sachs Group Inc. expects below-consensus economic growth in the first half of next year, saying the initial stages of reopening will be negative for the economy, as was the experience in other East Asian economies. Morgan Stanley predicts China’s economy to remain “subpar” through the first half of next year. Standard Chartered Plc said growth in urban consumer spending will still lag pre-pandemic rates next year given the hit to household incomes during the pandemic.
The economy was already in bad shape this year because of the Covid outbreaks and a property market crisis. While China’s zero tolerance approach to combating infections has kept infections and deaths relatively low for most of the pandemic, the rapid spread of the highly infectious omicron variant exposed the challenges of maintaining strict controls. From snap city-wide lockdowns to almost-daily Covid tests, the restrictions have taken a heavy toll on people’s lives and the economy.
That discontent manifested in mass unrest at the end of last month. People in Beijing, Shanghai and elsewhere started to reject demands for quarantines or lockdowns of their housing estates, and between Nov. 25 and Dec. 5, at least 70 mass protests occurred across 30 cities, according to data compiled by think-tank Australian Strategic Policy Institute.
Authorities have moved to quell public anger by relaxing some Covid requirements around testing and quarantine — although the sudden and confusing changes to the rules over the past few weeks have injected more uncertainty about the economy’s outlook.
Here’s a deeper look at the economy’s downturn and the challenges it faces as China exits Covid Zero.
People have been cooped up in their homesChina’s cities have been hit hard by Covid restrictions, with mobility across the country’s 15 largest cities plummeting in recent months, according to congestion data released by Baidu Inc.
Major hubs are showing strain, including the capital Beijing, as well as Chongqing and Guangzhou. Trips there have plunged in recent months below levels in previous years, according to subway data compiled by Bloomberg.
Few have borne the brunt of China’s Covid Zero policy more than the financial hub of Shanghai, a major epicenter for recent protests. After a two-month lockdown this year to tackle a major outbreak, China’s richest city is still struggling to get back up off its knees.
Malls have seen a surge in vacancies, consumer spending has plunged, and spending in areas like food and beverages has been depressed, mirroring the national trend.
Lack of spending has hit the economy hardCovid restrictions have battered the economy, with consumers pulling back on spending and business output plunging. Retail sales unexpectedly contracted 0.5% in October from a year earlier, with economists surveyed by Bloomberg predicting an even worse outcome of a decline of 3.9% in November.
The government is expected to miss its economic growth target of around 5.5% by a significant margin this year. The consensus among economists is for growth of just 3.2%, which would be the weakest pace since the 1970s barring the pandemic slump in 2020.
With onerous testing rules, flare ups in holiday spots, and official advice discouraging travel, holidaymakers have stayed home, adding a further drag on retail spending. Tourism revenue declined 26% to 287 billion yuan ($40.3 billion) over the week-long National Day holiday in October compared to the same period last year. Flight travel also dropped to its lowest levels since at least 2018.
Youth unemployment is near a record high
That’s all combined to drive growing economic malaise among the country’s youth, with the unemployment rate among 16-24 year-olds soaring to a record high of about 20% earlier this year. Joblessness among young people is more than triple the national rate, with many graduates struggling to find work in the downturn, especially in the technology and property-related industries.
Unemployment will likely get worse next year, when a new crop of 11.6 million university and college students are expected to graduate, adding to pressure in the labor market. Factories are still struggling to cope with Covid outbreaks
So far during the pandemic, the industrial sector has held up better than consumer spending since factories were protected from Covid outbreaks and global demand for Chinese-made goods was strong. That’s changing now.
Export demand is plummeting as consumers around the world grapple with soaring inflation and rising interest rates.
The disruption at a major assembly plant in Zhengzhou for Apple Inc.’s iPhones and violent protests there last month also show the damage that outbreaks can have on production.
The housing market crisis continues to simmer
China’s ongoing real estate slump has also been a source of unhappiness for homebuyers. The property market, which has long been a major driver of the country’s economy, is in its worst downturn in modern history, with sales and prices plummeting. Cash-strapped property developers struggled to finish building homes, prompting mortgage boycotts by thousands of buyers in the summer.
Despite authorities introducing a spate of measures recently to help make borrowing easier and ease tight cash flows for developers, the economy’s downturn and lack of confidence mean the housing market continues to be depressed. The slump is not expected to end soon, with Bloomberg Economics expecting a 25% drop in property investment in the coming decade.Local governments are struggling to fund their spending
Government finances have come under severe pressure as the economy slumped. Land revenues have plummeted and local governments have had to boost spending on Covid control measures. The broad measure of the fiscal deficit in the first 10 months of the year is nearly triple the amount it was in the same period last year.
Relaxing testing and quarantine rules will help ease pressure on local government finances. However, it remains to be seen how far and fast authorities will go in dismantling Covid Zero if a surge in Covid cases puts strain on the healthcare system, a likely outcome given that a significant portion of the country’s elderly and vulnerable population are still unvaccinated or lacking booster shots.
–With assistance from Kevin Varley, Jin Wu, Danny Lee and Fran Wang.
The US Fed’s Balance Sheet Shows What’s Happening To The Economy
The mother of all charts is below. This is the Federal Reserve balance sheet history straight from their website:
This is where the world’s inflation comes from. Not all, of course, because central banks around the world have done the same. In goes new money and up goes the price of stuff. Now if there is less stuff, then up goes the price even more. However, without new money prices cannot rise across the board, inflation is always about money supply.
This is why the Fed is reining it in. Down goes money supply, down goes asset prices.
Now there is one modifying factor. If you pump new money into an economy and that money goes to drive up the prices of illiquid assets, then the inflationary impact will be in those illiquid assets and the new money will be locked up there and will only dribble into the “real economy.” Let’s say you pump in money and make it easy to be grabbed by people buying houses or stocks but make it hard to be grabbed by people buying groceries, well then up will go the price of houses and stocks but groceries will not be that much affected. The lucky (rich) folk with the stocks and house will get much richer and the people who need to buy groceries will get left behind somewhat but at least there won’t be runaway inflation outside of stocks and houses. Woe betide an economy that hands out money to people to buy groceries because boy is everyone in for a bout of inflation then.
Ring any bells?
So to get prices under control you have to drain money from the system because when there is too much in the wrong places it starts rushing around bidding up the price of everything.
There is too much money in the system and that money is parked and it’s parked at the Federal Reserve where banks who can’t use a big chunk of this new money have kind of handed it back to the Federal Reserve to look after. That is the reverse repo which has gone out of whack with all the new money magicked up to bridge the pandemic.
Here is a chart of it:
Note how it matches the Fed balance sheet in character. This money is a bulwark for the banks if things get tricky as they can pull this cash out and back into play in the real economy, but in normality it would be down at 2014-2018 levels if there was just about the right level of money in the system. The Fed will feel there is plenty of room to tighten while these balances are high because if banks need liquidity, there it is.
This is where the big call lies. If banks were to say to the Fed, nope we aren’t going to lend to anyone but you and turn the real economy into a credit desert while damming up the cash with the Federal Reserve then there is no hope of a “soft landing.” If the money stays in the system as is then inflation should run its course and the new money supply would match new price levels, which wouldn’t be so bad, but the trouble is government fiscal deficits would then necessitate further money supply increases creating further inflation which could only be combatted with more interest rate rises, causing a vicious circle of high inflation and stagnation. That is what happen in the 1970s…
But that is all “what if.”
The real map is the progress of these two charts. If these balances fall without much drama then all is working out well, but if tightening starts to badly disrupt the economy without these levels falling materially then it will be a signal to take cover.
The institutions think inflation is about to fall sharply and that then new QE will restart. I say ‘good luck with that.’ However, these charts will provide the guidance necessary to judge the likely outcome ahead.
For me there needs to be a capitulation to define the new beginning we are entering and that hasn’t happened yet.
Once again these charts will give a solid indication of what’s up next.
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