Looking back on 2019, we recall a year that was riddled with uncertainties. Troubling manufacturing figures and an inverted yield curve had some wondering if the end of the economic expansion was near. But the past few weeks have seen a clearing of many of the uncertainties plaguing the economic outlook, and the stock market has been reaching new heights in response. So, what can we expect from the U.S. economy moving forward?
GDP in the U.S. has grown impressively considering the global slowdown and a trade war with one of its largest trading partners, China. Using estimates of prior growth from the BEA and estimates of current growth from the Atlanta Federal Reserve, average GDP growth for 2019 was about 2.3%. This beats out the Fed’s estimates from earlier in the year, although it is still lower than the prior two years.
Those aforementioned uncertainties, slowing global growth due to geopolitical concerns and the trade war with China, weighed heavily on GDP growth in 2019. Although trade numbers as a whole are largely untouched, lower business sentiment led to reduced investment in 2019, after stellar 2018 numbers that were largely due to the business tax cut. The U.S. consumer maintained its strength, which has been attributed to persistent growth in the labor market and continued stock market gains.
Most recent Fed projections peg 2020 growth at 2%, a slight decrease from this year. This is because of an aging business cycle and weakness in manufacturing. However, the impacts of the trade war are beginning to take shape, and Boris Johnson winning general election in the U.K. has eased fears of a no-deal Brexit. With some of the headwinds concerning domestic and global growth subsiding, we could see more growth than anticipated.
Interest Rate Projections
After a series of three interest rate cuts over the summer and fall, the Fed held rates steady at the most recent FOMC meeting. Their statements indicated that they were feeling content with the current level of interest rates. This sentiment is reflected in their most recent projections, as the majority of the FOMC currently estimates no change to the fed funds rate in all of 2020.
The biggest issues weighing on interest rate projections are the lukewarm growth estimates, persistently low interest rates abroad, and low or decelerating inflation numbers. The Fed’s preferred measure of inflation, core PCE, is below the 2% target, currently at 1.6%. This is down from 1.7% in October and September, and 1.8% in August. Projections from the Fed predict that core PCE will average 1.9% in 2020. Central bankers will likely hold off on raising interest rates again until inflation picks up from the already accommodative monetary policy.
Longer term treasury yields have rebounded since the lows experienced at the end of the summer, however they are still quite low compared to last year. In addition, the yield curve reverted to a normal shape. Short term yields followed the rate cuts down, and the 3-month treasury still sits near its lowest level in almost two years. One of the most influential interest rates, the 30-year mortgage, followed long-term treasury yields upward during the past few months as mortgage rates were bolstered by improving housing starts and completions.
What should you expect from the economy and interest in 2020’s?
As mentioned earlier, uncertainty was rampant at the end of last decade, and that should continue into the 2020’s. Escalating tensions with Iran could result in higher oil prices. And, higher oil prices coupled with loose monetary policy could lead to a significant increase in inflation in the coming months and years.
On the other hand, global economic indicators seem to be trending in a positive direction, and if that continues, it could mean the continuation of a very fruitful domestic economy. Our advice is to stay abreast of economic developments and make decisions for your business based on the best data available.
To ensure you stay current on major economic or interest rate developments, follow ADM on Twitter, Facebook and LinkedIn. We provide a breakdown of each FOMC meeting, including expectations before the meeting and reaction afterward, so you can stay informed. In addition, if you want to be sure your business is getting the most competitive return on its deposits, give us a call. Marketplace Banking™ by ADM ensures your deposits are 100% protected by FDIC insurance all while earning the most competitive rates available.
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