United States / Analyst Insights
US Q4 2019 Macroeconomic Update

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by Mario Ismailanji and Jacqueline Hiner
Mar 04 2020

Overall, easing trade tensions have benefited the economy in Q4 2019. In December, the House of Representatives passed an updated trade deal between the United States, Mexico and Canada, called the US-Mexico-Canada Agreement (USMCA). However, this has yet to be ratified in Canada. Additionally, terms of a “phase one” trade deal between the US and China was agreed to in mid-December and went into effect mid-February.

Real GDP increased at an annualized rate of 2.1% in Q4 2019, marginally higher than the growth of 1.9% from the previous quarter, according to the Bureau of Economic Analysis (BEA). This increase is primarily a result of positive personal consumption expenditure (PCE) and residential construction investment. However, GDP growth was inhibited by private inventory investment and nonresidential construction investment. In response to slowdown concerns, the US Federal Reserve cut its federal funds rate once in October.

Continued labor market growth

Through 2019, the US economy has seen continued growth in employment. In Q4 2019, the US economy added 128,000 nonfarm jobs, according to the Bureau of Labor Statistics, continuing the trend of job growth. So far in Q1 2020, this pattern has continued, with 225,000 more nonfarm jobs being added, bringing the 12-month moving average job growth to 174,000.

The continued addition of jobs across most industries remains a positive indicator for the labor market. The sectors with the most-notable job growth were retail trade, education and health services and government. Meanwhile, construction employment fell, resulting from declining nonresidential construction activity, as businesses prepared for a potential economic downturn.

Continued labor market growth has kept the unemployment rate low, although likely bottoming out around 3.5% in 2020. In Q4 2019, the unemployment rate averaged 3.5%, encouraging some increase in hourly wages. Average hourly earnings increased $0.21 to $28.37 in Q4. Furthermore, US salary budgets are expected to rise by an average of 3.3% in 2020, already increasing $0.07 in January.

Consumption patterns

As wages and employment increased, consumer spending also exhibited continued growth. As people make more money, they are likely to increase their spending. Overall, PCE has grown 0.8% in Q4, representing a $121.6 billion increase over the quarter. Growth in PCE is primarily driven by services, due to its large share of total PCE, which increased the most in dollar terms by $105.2 billion. Services increased 1.0% over Q4, while non-durable goods grew 0.6%. Within services, housing and utilities, healthcare, financial services and insurance represent the largest spending categories. However, the strongest areas of growth in Q4 were transportation services and recreation services. Spending on non-durable goods was driven by spending on gasoline and other energy goods, but was dragged down by declines in spending on food, clothing and footwear. Meanwhile, durable goods declined marginally by 0.1% during Q4. All spending categories within durable goods declined, except motor vehicles and parts, which increased marginally by 0.4%.

Construction trends

Construction activity is considered a leading indicator of business and consumer activity, as businesses and consumers that are optimistic about the future, and businesses, in particular, are more likely to invest in the hopes that doing so will generate higher revenue and profit. While overall construction activity stagnated for much of 2019, it exhibited some growth in Q4 due to an increase in residential activity. Overall, construction trends have diverged in Q4, with nonresidential spending contracting while residential spending has spiked, indicating a relatively mixed economic outlook and some discrepancy between consumer and business outlooks. In particular, rising residential construction was powered by very low mortgage rates and supply for homes lagging behind demand.

In Q4, nonresidential construction spending declined 1.2% in December and 0.8% for the quarter. This is indicative of businesses losing confidence in the outlook period as a result of trade negotiations and coronavirus concerns. Nevertheless, nonresidential construction is still up 4.4% from 2018.

Conversely, lower borrowing costs, a resilient labor market and healthy consumer spending encouraged Home Builders (industry report 23611a) to pursue new projects. Consequently, residential construction has grown tremendously during the quarter, with growth of 3.5% in the quarter, 1.4% in December specifically and 5.8% from last year. Moreover, despite a 2.4% decline in December, building permits are up 12.9% for Q4 and 8.0% year-over-year, which coincides with the expectation and realization of several interest rate cuts in the quarter. Homebuilders likely were very optimistic about housing demand, as housing inventory has been quite low and mortgage rates fell significantly in 2019. Additionally, with labor markets strong, expectations have been that there would be strong demand for new homes. However, economic uncertainty has increased at the start of Q1 2020, slowing construction activity.

Overall, total construction investment fell 0.2% in December, but is up 0.9% for the quarter and 5.0% since Q4 2018. This is largely due to strong growth for residential construction. However, with growing economic uncertainty for businesses and consumers, there is considerable downside in construction’s outlook.

Financial markets

Despite positive consumer indicators, inflation has grown at a rate below that of the Fed’s 2.0% target, growing 1.6% year-over-year. In Q4 alone, inflation decelerated, growing only 0.3% over the quarter. Throughout 2020, inflation is anticipated to accelerate but will likely remain below 2.0%.

The Federal Open Market Committee (FOMC) cut interest rates once in Q4 effective October 31 as a precautionary effort to protect the United States from slowing growth in China and Europe, as well as uncertainty over the trade war. The rate of 1.75% was maintained at the following meeting percent as the labor market remains strong and economic activity has been rising at a moderate rate.

Unemployment has remained low and household spending growth has been strong, while business fixed investment and exports has been weak, indicating some discrepancy of the overall economy between business and consumers. Additionally, bank lending standards, which can indirectly gauge the health of the economy, have tightened. However, lending standards have not tightened to the levels historically coinciding with reductions in hiring activity. Nevertheless, due to uncertainty of financial markets resulting from the coronavirus outbreak and below-target inflation, another interest rate cut is probable in Q1 2020.

The S&P 500 is the headline index of large-cap U.S. equities, which includes 500 leading companies that capture approximately 80.0% of available market capitalization. US equity markets, measured by the performance of the S&P 500, produced a total return of 9.1% in Q4 2019, representing a 31.5% return in 2019. Overall, in response to the US and China’s “phase one” trade deal announcement, some economic uncertainty reduced and US equities benefited.

Overall, information technology and healthcare, performed the strongest at 14.1%, followed by financials at 10.5%. The information technology sector benefitted strongly from easing trade tensions. Healthcare did well due to a series of positive news items regarding trial results, deal activities and strong earnings. Moreover, the financials sector has benefitted from the current low-rate environment as well as a considerable amount of job additions throughout the quarter. With the new jobs, consumers were encouraged to increase spending. Additionally, online shopping and digital and mobile payments have contributed to record holiday sales.

Energy stocks, which had lagged the broader S&P 500 index materially in 2019, rallied as the oil price rose on lower-than-expected supply. Although typically less exposed to economic growth, the real estate sector declined 0.5%. Additionally, the industrials and utilities sectors were flatter over the quarter increasing 5.5% and 0.6%, respectively.

Despite a trend of generally smaller deals, some notable large mergers and acquisitions occurred during the quarter. Fiat Chrysler and Peugeot maker PSA announced a binding agreement to a $50.0 billion merger. LVMH Moet Hennessy Louis Vuitton SE announced its $16.2 billion acquisition of Tiffany & Co. Additionally, Google’s parent company, Alphabet Inc. announced its acquisition of Fitbit for $2.1 billion.

Darkening economic outlook

One leading indicator of a recession is an inversion between the yields on short- and long-term treasuries, often the spread between the 10-year and either three-month or two-year. Typically, longer-term treasuries have greater price sensitivity to interest rate changes, and therefore must yield higher interest rates to compensate investors for the added risk. When the yield curve inverts, short-term treasuries yield more than longer-term treasuries, an indication that investors believe economic conditions will deteriorate and that interest rates are likely to fall in the near future.

In August 2019, the10-year and two-year yield curve temporarily inverted. However, it has since ranged from 0.09% and 0.3%. Nevertheless, the economy is still in the 12- to 14-month period following an inversion when a recession has historically occurred. Moreover, despite a temporarily positive outlook in Q4 without an inversion, the effects of the coronavirus on the US economy, while in the long-term, have wreaked havoc in the short-term.