KEY DATA: ISM (NonMan.): +1.1 points; Orders: -2.2 points; Backlogs: -1 point/ Trade Deficit: -$3.9 billion; Exports: +0.7%; Imports: -1%
IN A NUTSHELL: “Growth might have been modestly better than expected at the end of last year, but only because the tariffs created dislocations in trade flows.”
WHAT IT MEANS: It’s a new year but we are still trying to get a handle on how the economy ended last year. It looks like growth in the 2% is the new normal. Actually, it is more like the old normal given that is what we averaged during most of the 2010s. Looking at the service segment of the economy, that is the level of growth we are still seeing. The Institute for Supply Management’s NonManufacturing rose in December. The fourth quarter average points to a GDP growth rate of somewhere around (drum roll please) 2%. That said, the details were not that great. In particular, orders grew more slowly and backlogs shrank for the third consecutive month. Those results don’t point to any improvement in the service portion of the economy in the early part of 2020.
On the other hand, it looks like the fourth quarter may have been helped along by distorted trade flows. Indeed, despite what appears to have been decent consumer spending, imports fell in November. That shouldn’t happen in this type of economy. While we should not expect demand for foreign products to be booming, they should be growing. Purchases of consumer and capital goods were down solidly. Contrasting that was a moderate increase in exports. The rest of the world is growing slowly and is still buying our products, an indication that our import situation is not due to fundamental economic factors. With exports rising and imports falling, the trade deficit narrowed to the smallest level in three years. Much of that came from the roughly fifteen percent drop in imports from China. The trade deficit with China has also narrowed by the same percentage. MARKETS AND FED POLICY IMPLICATIONS:We will not get the first reading of fourth quarter growth for three more weeks, but it is likely to be about 2% to 2.25%. At least that is what I have had for months now and there is no reason to believe that will not be the case. The wild cards are the usual ones. We don’t know what happened to trade in December since the decision to put off the additional tariffs on Chinese products was made too late to cause any major change in the import pattern. Also, Boeing’s decision to suspend production, which had led to planes being inventoried, also may have come too late to change the inventory number, though that is unclear. But consumer and business spending looks to have been moderate and if we focus on those fundamental components, it is clear that growth is okay but not great. So, where do we go from here? More than likely, more of the same. And given the way investors loved that level of growth last year, they will likely continue to eat up stocks this year. The one big difference is that there isn’t an extra trillion dollars to buy back stock, so the artificial hyping of stock prices may slow. At least it should. As for the Fed, it is likely on hold for quite some time. There may still be some who think rates should be lowered, but not a lot of them are voting members of the FOMC.