As we begin to get a peek at what 2020 might have in store for investors, we continue to see some encouraging signs in the economic data. Following a growth slowdown in the middle part of 2019 as the US-China trade war stifled businesses’ willingness to spend, along with the negative impact of the General Motors strike, we see signs that manufacturing activity and perhaps capital expenditures will be additive to growth in 2020.
The phase I accord between the US-China should provide more confidence to business operators that tensions between the world’s largest economies have eased. Also, the ISM Purchasing Manager’s Index, which is a measure of US manufacturing activity, rose back into growth territory in January after steadily falling into contraction territory last year. If this trend continues, it should provide a boost to economic growth, which has been running just above 2% on the back of a very healthy US consumer. Boeing is a major US manufacturer that has been embattled and mired in a production slump.
But if the airplane maker can get clearance from the FAA to re-start production of the 737 MAX aircraft in the coming months, that would provide a boost to their extensive supply chain and manufacturing activity in general. Additionally, the January jobs report was very encouraging as hiring again strengthened, and more people entered the workforce. An additional 225,000 jobs were added in January, which beat expectations -- this marked the 112th straight month of job gains. The prior three-month average climbed to 211,000 new jobs versus an average of 175,000 jobs/month added in 2019. The unemployment rate remains near 50-year lows at 3.6%, and reasonable hourly wage gains of 3.1% are being realized by workers, although targeted wage growth is closer to 3.5%.
Average Hourly Nominal Wage Gains (all non-farm employees)
Source: Bureau of Labor Statistics; Bloomberg
The labor market and the consumer remain on a very solid footing in the US. With consumer spending accounting for roughly 70% of GDP, high employment with growing wages bodes well for the economic recovery to continue into year 11. It also gives the Federal Reserve, which sets monetary policy, including interest rates, comfort that the domestic economy is in a good spot. Interest rates are unlikely to move much from their current level as inflation remains muted. Tepid inflation in the economy is another helpful factor for consumers. The biggest risk factor to monitor now seems to be the spreading coronavirus threat, although very few cases have reached the US so far. While the global impact of the virus is unknown, for now, the US economy seems to be chugging along at a very healthy clip entering the new decade.