Our expectations for 2020 economic activity are not markedly changed from 2019. In general, we expect growth of about 2.5% and interest rates to remain subdued.
Positive factors going forward are low unemployment, rising wages, rising spending, extremely positive consumer debt levels with increased savings, inventories that need to be rebuilt, trade deals getting closed (even if the China deal is no more than an end to escalation), and an uptick in government spending.
Savings, Sales, and Debt Load - show very positive trends
Negative factors are low global economic growth, a lack of available workers in the US, and the usual political uncertainties at home and abroad.
Some areas that we will be watching closely are manufacturing through the purchasing managers indices (PMI), freight hauling numbers, and wages.
There is currently a divergence between the ISM Survey and the Markit Survey on manufacturing PMIs. The ISM Survey has been holding at multiyear lows while the Markit Survey has shown a return to manufacturing growth. One reason for the divergence is the difference in ‘who’ is measured in both surveys. The ISM Survey is weighted to larger multinational producers while the Markit Survey is broader and more domestic-based. This also concurs with our belief that global growth is weaker than US growth in general.
ISM Survey - still at multiyear lows showing contraction
Markit Survey - has recovered and shows growth
When it comes to freight being hauled, we mainly use the Cass Freight Index, along with Railcar loads to track how much goods are being moved. the movement of goods is usually a good indicator of economic activity. Throughout 2019 the comparison to 2018 was difficult because many companies stocked up heavily on inventories in 2018 to beat the possibility of tariff increases. The gap in mid-2019 to 2018 was very large and in fact, one could argue we were or even still are in a ‘freight recession’. While recent numbers have been ‘less bad’, we’re still waiting for an upturn.
The upturn in trucking is likely to start when inventories built up in 2018 are exhausted and need to be replenished. The drop in wholesale inventories over the last 6 months leads us to believe that replenishment will need to start soon. Given the increased level of Retail Sales and strong employment and wage levels as noted above, companies could soon run the risk of capturing revenue due to lack of inventory.
Wholesale Inventories - look to be bottoming
While we’ve been concerned by the divergence in the two PMI surveys and the drop in freight movement, we do believe that they are outgrowths of inventory building in 2018 and slower expected global growth versus US growth.
On interest rates, we’ve been watching wages for a sign acceleration that could drive up costs for business owners that would require an increase in prices to maintain profitability. So far, that has not happened as wage growth has been solid, but has been offset by technology adoption and usage that has limited cost increases. Yet, with 1.25mm more job openings in the US than available workers to fill them, it is possible that businesses will get into ‘bidding wars’ for workers and that could drive up prices.
We believe that the Federal Reserve would likely let inflation increase by 3% before tightening rates (we're currently around 1.9%), but in the absence of communication from the Fed, the market participants could easily do that for the Fed by steepening the yield curve and pushing longer interest rates higher if they feel the Fed is too slow to act. Likely it would at least 2-3 quarters before the market reacted in that manner.
Therefore, our outlook for 2020 is balanced. We expect growth of around 2.5% with no major increase in interest rates. We expect that stock markets will respond positively.