US Economic Outlook
Group Economic Research & Strategy, 6 September 2019
Key Takeaways:
•The US economy continues to face
significant downside risks; trade war
remains #1.
•Consumer spending is still resilient
and consumer sentiment relatively
robust.
•By contrast, manufacturing is
contracting, and capex trends are
weak.
•Amid high levels of geopolitical
uncertainty, we now expect at least
three more Fed rate cuts, and see
10-year bond yields ending the year
at 1.4%.
In the face of trade tensions and a
slowing global economy, US
manufacturing is contracting.
Business investment has already
slowed, and forward-looking
indicators point to some red flags.
Jérôme Jean Haegeli
Group Chief Economist
Jerome_Haegeli@swissre.com
Thomas Holzheu
Chief Economist Americas
Thomas_Holzheu@swissre.com
Kulli Tamm
Senior Economist
Kulli_Tamm@swissre.com
Mayank Raturi
Senior Economist
Mayank1_Raturi@swissre.com
Group Economic Research & Strategy | Swiss Re Institute
In light of a softer global backdrop and further trade escalation since the July rate
move, we now expect the Fed to cut rates by 25 bps in September, December and
January. Although some of the US tariffs on China announced on August 1 and
effective September 1 were delayed until December 15, retaliation by China and a
further 5% ramp-up on all current and announced US tariff levels have marked yet
another escalation in tensions between the two countries in recent weeks. A
technical recession is likely in Germany, adding to global headwinds. Brexit
developments and other geopolitical tensions (eg change of government in Italy,
souring of relations between Japan and Korea, protests in Hong Kong) compound the
uncertainty. The manufacturing sector has been hit the hardest, and forward-looking
business investment indicators are worrisome, while the domestic consumer
segment largely still remains resilient. Bond markets have repriced sharply, with the
US 10-year yield falling by roughly 50 bps to around 1.6% since late July. We don't
expect the 10-year yield to rise above current levels over the forecast horizon,
coming in at 1.4% at year-end 2020. Meanwhile, our baseline US growth outlook is
unchanged from last month, at 2.3% yoy in 2019, slowing to 1.6% next year.
Manufacturing industrial production contracted mom in July, and was down 0.5%
yoy – a sharp round-about from a nearly 4.0% rate of growth a year ago.
Furthermore, the Institute of Supply Management's Manufacturing PMI index fell to
49.1 in August, the lowest reading since January 2016. A reading below 50 implies
contraction. The composition of the report was also weak, with the production, new
orders, and employment components all falling into contractionary territory. The new
export orders component fell to the lowest level since April 2009.
The overall pace of non-residential business fixed investment has slowed
significantly, from above 6.0% yoy in the first three quarters of 2018, to just 2.6%
yoy in 2Q19. Some of the slowing could be attributable to waning fiscal stimulus, but
a majority of evidence suggests the trade war as a key driver. In a red flag looking
ahead, the pace of advance in core capital goods shipments fell further, to just 1.1%
yoy in July and new orders contracted yoy, both readings the weakest in almost three
years. Other forward-looking capex indicators have also weakened sharply recently,
particularly for the largest category of equipment spending such as the Cass freight
shipment volume growth and the Chicago PMI. Our baseline forecast calls for a
rebound in 3Q19 as some activity is pulled forward ahead of further tariffs with a
corresponding deceleration thereafter, but not a collapse. However, a larger than
estimated impact from trade tensions or a further escalation (eg auto tariffs) present a
sizable downside risk to this projection.
US Forecast Summary
2018 2019 2020 2018 2019 2020
Real GDP (% change) CPI (% change)
Swiss Re Institute 2.9 2.3 1.6 2.4 1.9 2.3
Consensus (Aug) 2.3 1.9 1.8 2.1
IMF 2.3 1.9 2.0 2.7
Fed Funds Rate (%) 10y Gov. Bond Yield (%)
Swiss Re Institute 2.38 1.63 1.38 2.69 1.40 1.40
6 September 2019 1
 US Economic Outlook
Manufacturing in recession:
As a result of escalating trade wars
and a slowing growing global
economy, the manufacturing
segment is now in contraction.
Consumer spending has thus far
remained resilient, …
… and the consumer segment
supported by strength in the labor
market.
While inflation is still moderate,
the effect of tariffs on prices may
be finally showing up in the data.
On account of significant
downside risks, we now expect at
least three more Fed cuts in the
baseline, and don't see long bond
yields rising from today's levels.
This document, prepared by Swiss Re’s sigma research, Swiss Re Institute, is for information purposes only. It is not intended as an offer or solicitation for the
purchase or sale of any financial instrument. The information contained in this document has been obtained from sources believed to be reliable; however, its
accuracy and completeness cannot be guaranteed. The views reflected herein are subject to change without notice.
Group Economic Research & Strategy | Swiss Re Institute
15 65
10 60
Percent Change Year Ago
5 55
0 50
Index
-5 45
-10 40
-15 35
-20 30
Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19
Manufacturing Industrial Production (lhs) Manufacturing PMI (rhs)
Source: Datastream
Meanwhile, consumer spending has been resilient and remains the main driver of
growth. In the second estimate of 2Q19 GDP figures, the pace of real consumption
was revised up from 4.3% to 4.7% qoq annualized – the strongest quarter since
4Q14. Outlays remained strong in July, when personal consumption expenditure
increased by 0.4% mom. Furthermore, the Conference Board's consumer confidence
index remained near cycle highs in August. However, the elevated present situation
vs future expectations differential is sending a "late cycle" signal. Additionally, the
University of Michigan consumer sentiment index fell to a nearly three-year low in
August. Key to watch for rising recession risk would be if the weakness seen in the
Manufacturing PMI starts spreading over to the larger services sector. For now, the
August reading of the services PMI is still consistent with solid growth at 56.4.
In support of the consumer segment, the labor market remains strong. The
unemployment rate in August was at 3.7% for a third month, and the economy added
130,000 jobs according to the establishment survey. Although the pace of job
growth has slowed compared to last year, with 156,000 positions created on
average over the past 3 months, vs 223,000 in 2018, this is still above average
labor force growth. Some of the late-cycle slow-down in job growth is also
attributable to limited availability of workers. Trends in the aggregate labor input are
somewhat more worrisome, slowing to just 1.0% yoy in August, from a recent peak
of 2.8% in January. That said, the timeliest indicator for any significant turn in the
labor market are initial jobless claims, which have remained near cycle lows.
Inflation remains moderate, though there are some signs of a pick-up as a result of
tight labor markets and some tariff pass-through. In both June and July, the Core CPI
increased by 0.3% mom, which was the strongest consecutive two-month price
increase in over a decade. On a yoy basis, core CPI was up 2.2% in the latest reading.
Meanwhile, the Fed's preferred measure of core PCE inflation was more tame at
1.6% yoy for the same month.
Monetary policymakers continue to sound relatively upbeat on the domestic
economy, while acknowledging foreign weakness and emphasizing sizable and
significant downside risks. Notably, Chair Powell remarked in his Jackson Hole
speech that shifts in the anticipated path of policy have contributed to keeping the
domestic growth outlook favorable thus far. In light of a softer global backdrop and
further trade escalation since the July rate move, we now expect the Fed to cut rates
by 25 bps in September, December and January. Meanwhile, we lower our forecast
for long bond yields, to 1.4% through end-2020, largely reflecting the market re-
pricing since late July as well as the Treasuries' status as a safe haven, in particular
with ECB likely to embark on further stimulus including QE this month.
6 September 2019 2