United States / Analyst Insights
Q2 2019 Macroeconomic Update

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by Mario Ismailanji, Senior Technical Analyst; Rachel Hyland, Senior Analyst; Ryan Roth, Lead Analyst
Sep 04 2019

The United States’ inflation-adjusted GDP increased 2.1% in Q2 2019, less than Q1’s 3.1% growth, according to the Bureau of Economic Analysis (BEA). This increase is primarily a result of positive personal consumption expenditure (PCE) growth and government spending at the federal, state and local levels. However, GDP was hindered by private inventory investment, exports and both residential and nonresidential fixed investment. Additionally, domestic inflation has still grown only slightly, leading the US Federal Reserve to decrease the federal funds rate following its meetings July 30-31.

Labor and consumer trends

The US economy added a total of 435,000 nonfarm jobs in Q2 2019, according to the Bureau of Labor Statistics, followed by an additional 164,000 in July; as a result, the 12-month average for job growth is currently 195,000. Growth remained strong in Q2 2019, with every sector, except Retail Trade (IBISWorld sector report 44-45) and Utilities (sector report 22), experiencing an uptick in employment. The Educational Services (sector report 61) and Healthcare and Social Assistance sectors (sector report 62) gained 165,000 jobs over the quarter, while the Professional, Scientific and Technical Services (sector report 54) and Construction (sector report 23) sectors also fueled overall employment growth.

While consumer spending on services rose 0.6% in Q2 2019, amid relatively high employment gains and the US economy’s continued shift toward services, consumer spending on durable goods also increased 3.1% due to higher spending on recreational goods and vehicles. However, this increased personal consumption expenditure hasn’t translated into inflation, thus drawing concern.

Given the Fed’s dual mandate of balancing unemployment with inflation, the prevailing economic landscape is influencing monetary policy. The Fed’s target inflation rate is 2.0%, but the Personal Consumption Expenditures (PCE) Price Index, excluding food and energy, has only expanded 1.6% over the past year. As a result, the Fed is closely monitoring inflation, which is expected to play a prominent role in its next meetings September 17-18.

Furthermore, a relatively low unemployment rate and stable labor force participation indicate a relatively tight labor market. Accordingly, wages showed steady increases in Q2, with average hourly earnings increasing 3.2% year-over-year (YoY). Businesses have had to increase wages to maintain current employee counts and attract new talent. As a result, average hourly earnings for employees on private nonfarm payrolls rose a further $0.08 in July 2019, reaching $27.98.

Construction trends

Construction spending is a leading indicator of business investment and consumer activity; businesses tend to spend more on building projects when they believe opening new locations will generate increased revenue and remain profitable long-term. However, while construction activity has grown over the past 10 years, nonresidential construction spending declined during Q2 2019. This indicates a relatively pessimistic outlook and point of concern for the overall domestic economic outlook. During the quarter, nonresidential construction spending declined from $794.1 billion in April to $773.8 billion in June. With wage pressures increasing costs for businesses and interest rates on the rise, construction operators have delayed projects following a period of accommodative borrowing. During Q2, the largest declines in nonresidential construction were in the educational and highway and street segments, which fell 8.2% and 5.2%, respectively.

Similarly, total residential construction activity slowed during Q2, reaching $513.2 billion. With relatively higher interest rates, consumers have felt less inclined to invest in new homes. Additionally, lumber tariffs and relatively expensive labor costs have significantly impacted homebuilders. As a result, the number of housing permits issued declined during Q2, decreasing from 1.3 million in April to 1.2 million in June.

Financial markets

Financial markets experienced some volatility in Q2 2019, primarily as a result of US protectionism, trade tensions with China and relatively lower consumer and business confidence. Some new developments, such as new tariffs on Chinese goods, have stoked fears of further escalation in the US-China trade war. These new tariffs would result in consumers bearing the brunt of the associated costs, while producers continue to lose China as a valuable export destination. Still, expectations of an interest rate cut, which ultimately occurred in August following the Fed’s July 30-31 meetings, fueled growth in US equity markets during Q2 2019. As a result, the S&P 500 index, which represents the 500 largest companies based on market capitalization, rose 4.3% during the quarter.

As stated, the Fed’s decision to cut interest rates, effective August 1 to a range of 2.02.25% was widely expected due to rising uncertainty in both the US and global economies. The US economy is securely in a late-cycle phase of the business cycle, meaning that it is overheated and poised to fall into a recession within the next two years. To counter this, the Fed has decided to take precautionary risk steps toward a dovish monetary policy. With relatively low unemployment and inflation failing to materialize, this first decrease in interest rates since 2008 represents an attempt to stimulate economic activity and protect the US economy from slowing growth in China and Europe and trade war uncertainty.

Fed Chairman Jerome Powell has stated that he still believes the outlook for the United States is positive, and this action is designed to support this outlook. However, the yield on the 10-year and two-year Treasury notes inverted in August 2019. Such yield curve inversion occurs when short-term Treasurys yield more than long-term ones, as investors consider short-term debt instruments to be riskier than long-term obligations. This represents a relatively negative economic outlook, as historically, yield curve inversions have signaled the potential onset of a recessionary period, which has led to relatively high levels of investor uncertainty and low levels of consumer and business confidence. Accordingly, the next interest rate decision following the Fed’s September 17-18 meetings will be highly significant to the US’ economic future.

The threat of this market decline did, however, spur a substantial amount of IPO activity during Q2 in a late-cycle rush to secure public funding while conditions are still good. The Q2 2019 IPO market was dominated by the highly anticipated $8.1-billion Uber IPO, as well as other billion-dollar IPOs for Chewy and Pinterest. In total, Q2 2019 raised $25.0 billion through 62 new equity issues, representing an increase of over 90.0% from Q2 2018 and the most active quarter for IPOs of the past five years.

Similar to the IPO market, the merger and acquisition (M&A) market was underscored by numerous “megadeals,” which accounted for nearly 70.0% of announced US deal value, according to PricewaterhouseCoopers (PwC). Total M&A volume reached $1.2 billion through 7,112 deals as of August, representing slightly slower M&A activity compared with 2018. As companies focused on expanding their product and service offerings, some notable deals during Q2 2019 included AbbVie acquiring Allergan for $63.0 billion and United Technologies agreeing to merge with Raytheon. Additionally, Salesforce announced a deal to purchase Tableau Software for $15.7 billion, which is expected to significantly boost the company’s data-analysis and presentation abilities.





Looking for additional coverage on US macroeconomic trends? Check out our previous Spotlight Report on Industry Insider for IBISWorld’s Q1 2019 Macroeconomic Update!




Edited by Kieran Newton