Quarterly Update

Oct. 2019

Paul Single, Managing Director, Senior Portfolio Manager | Oct. 2019

Tug of War: Economy and Geopolitical Uncertainty in Conflict

The U.S. economy is continuing to do well.

Geopolitical uncertainty is centered around trade tensions between the U.S. and China.

As for the domestic economy, it is on a solid footing despite a summer full of uncertainty that included the trade tensions, a slowing global economy and at times an inverted yield curve.

We believe the economy will continue to grow.

The U.S. economy is continuing to do well. However, geopolitical uncertainty is overshadowing its potential. Therein lies the tug of war.

Geopolitical uncertainty is centered around trade tensions between the U.S. and China. The conflict, which has been going on for more than a year, escalated between May and August. It has softened since then, with both sides making minor concessions. There is an important trade meeting scheduled for October. A resolution is not expected from that meeting, but it should supply insight on the future tone and trajectory of negotiations — will they be cordial or hostile?

As for the domestic economy, it is on a solid footing despite a summer full of uncertainty that included the trade tensions, a slowing global economy and at times an inverted yield curve. Broadly speaking, the economy is being supported by longevity (the longest expansion on record at 123 months), an unemployment rate near 50-year lows, and ongoing growth above potential (see chart).

Looking at the various components of the economy reveals yet another tug of war. The manufacturing sector, which accounts for a little more than 10% of GDP, is showing relatively flat growth and some contraction. Meanwhile, consumer spending, which makes up almost 70% of GDP, is growing much faster than the overall economy. In Q2 it grew at a robust pace of 4.6%. Estimates for Q3 are pointing to a slower pace of growth, maybe around 3.0%.

There is an important caveat here. Manufacturing tends to be a coincident or leading indicator, while consumer spending tends to be a lagging indicator. Just because manufacturing has not been performing well of late doesn’t mean it cannot change direction. Twice before in this expansion, the manufacturing sector has drifted into the contraction zone only to bounce back (see chart).

We believe the economy will continue to grow. However, since it is at a mature stage of expansion, it will do so more slowly than last year, supported by continued labor growth and benign inflation and consumer spending.

Key Points

The U.S. economy is continuing to do well.

Geopolitical uncertainty is centered around trade tensions between the U.S. and China.

As for the domestic economy, it is on a solid footing despite a summer full of uncertainty that included the trade tensions, a slowing global economy and at times an inverted yield curve.

We believe the economy will continue to grow.

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