Another air pocket
Bottom Line The U.S. remains a tale of two economies. On the one hand, the labor market is healthy, the housing market has bounced back due to the Federal Reserve interest-rate cuts and, buoyed by solid Christmas retail sales, consumer spending continues to drive growth. Also, inflation remains benign and stock prices keep hitting record highs, powering a sustained wealth effect.
On the other hand, manufacturing remains weak. The good news is that the General Motors strike, in which 48,000 United Auto Workers walked off the job for 41 days, was settled late last October. Auto-related manufacturing is now getting back on track. Also, the ongoing China trade-and-tariff uncertainty should diminish with the signing of the Phase One trade deal in Washington, D.C., today. This trade war has had a negative impact on CEO confidence, corporate spending, productivity, and economic and corporate-profit growth over the past several quarters. That could reverse in coming months.
But Boeing’s recent decision to halt production of its grounded 737 MAX jet will create an air pocket for first quarter 2020 GDP growth of about 0.5% (within a range of 0.25% to 1%). Some 600 U.S. manufacturing companies are directly impacted by Boeing’s temporary production shutdown, with an estimated 8,000 other companies across the country indirectly affected. Investors seem to be looking through its negative impact on manufacturing activity and first-quarter growth. In our view, the company’s leadership change before year-end was critical. The more cooperative and conciliatory attitude it has recently adopted should enhance its chances of the Federal Aviation Administration (FAA) approving its proposed software fix and pilot retraining program. A resumption of production could happen in the second quarter.
After a difficult first quarter, we expect to see a reacceleration in both economic and corporate profit growth over the balance of calendar 2020. To be sure, winter is coming. But investors seem to be looking to spring. The S&P 500 has rallied by more than 15% since early October, achieving our 3,100 target price for year-end 2019 by November, with the market approaching our 2020 price objective at 3,500.
Adjusting our GDP outlook The fixed-income and equity investment professionals who comprise Federated’s macroeconomic policy committee met earlier this week to analyze how the Boeing situation will impact the domestic and global economy:
- The Commerce Department will flash fourth-quarter 2019 GDP on Thursday, Jan. 30. We raised our estimate from 2.1% to 2.3% (versus 2.1% in the third quarter), while the Blue Chip consensus increased its from 1.7% to 2% (within a range of 1.4% to 2.6%). The Atlanta Fed’s GDPNow model is at 2.3%, up from 1.3% in early December. We still expect a solid 4-4.5% gain for Christmas spending this year compared to 2018. Lastly, the balance of trade deficit has improved nearly 30% over the past year.
- Both we and Blue Chip consensus have kept full-year 2019 forecasts unchanged at 2.3%.
- We lowered our first-quarter of 2020 GDP growth estimate from 2.2% to 2%, as we’re factoring in broad economic weakness from Boeing’s decision to temporarily halt production of its 737 MAX plane during at least January. But with the signing of the Phase One trade deal, the U.S. may begin to increase agricultural and energy exports to China later in the first quarter. This could offset some of the manufacturing weakness we envision from Boeing. The Blue Chip consensus lowered its estimate from 1.7% to 1.6% (within a range of 1% to 2.3%).
- We expect the FAA to give Boeing the green light to resume production by the end of the first quarter, which should lead to an upturn in manufacturing activity in the second quarter. We also expect stronger export volume to China and a robust consumer during the Easter season. We raised our second-quarter of 2020 GDP growth estimate from 2.8% to 3%, while the Blue Chip raised its a tick from 1.8% to 1.9% (within a range of 1.1% to 2.6%).
- With the China deal finally in place, we expect an improvement in CEO confidence, more capital expenditure (capex) spending and an increase in productivity growth. In conjunction with catch-up spending surrounding Boeing, economic activity should reaccelerate in the back half of 2020. We raised our third-quarter of 2020 growth estimate from 2.6% to 2.8%, while the Blue Chip lifted its from 1.7% to 1.8% (within a range of 1.3% to 2.3%).
- With economic- and market-friendly election results in hand, we’re expecting a good Christmas and a continued increase in manufacturing activity. We increased our fourth-quarter of 2020 growth estimate from 2.6% to 2.9%. Blue Chip consensus has boosted its from 1.6% to 1.9% (within a range of 1.4% to 2.4%).
- We kept our full-year 2020 GDP growth estimate unchanged at 2.4%. The Blue Chip consensus has increased its from 1.8% to 1.9% (within a range of 1.5% to 2.3%).