By almost every measure the US economy did well in Y 2019 though growth was slower than Y 2018.
For next year, contrary to the consensus view from most economists, economic growth will accelerate. And growth could increase even more after Y 2020.
President Trump has set the stage for a prolonged period of high growth, full employment and low inflation, those are nearly perfect economic conditions.
Many economists are forecasting growth in Y 2020 to be 2% or less. They are likely underestimating.
The Big Q: Why?
The Big A: Because some Key interest rates were near Zero and because the Fed was worried about inflation, they raised interest rates eight times from the end of Y 2016 to the end of Y 2018. Just as growth was accelerating in Y 2018, the Fed choked the economy with the rapid increase in interest rates.
Making things worse, the Fed decided to reduce its balance sheet. That meant the Fed would sell nearly half a trillion dollars of bonds they held. When the Fed sells bonds, money is removed from the economy. The reduction in the money supply will slow economic growth.
The tax cut passed by Congress in Y 2017 and implemented in Y 2018 accelerated economic growth.
At the time, many economists, especially those in The Trump Administration, predicted higher than 3% annual growth. That did not happen. As President Trump correctly pointed out, it was the Fed’s monetary policy that held down growth. Fortunately, the Fed realized their mistake in mid-2019.
Midway through Y 2019, the Fed realized its mistake. Interest rates were lowered 3X and the Fed stopped reducing its bond holding.
They also injected some cash back into the system, partially reversing the damage done previously. It typically takes 6-9 months for the Fed’s actions to be felt in the economy.
Growth estimates for Q-4 of Y 2019 by most economists are generally in the 2% range or lower. Yet the strength in the consumer sector probably means Q-4 growth will exceed 2%, and probably be in the 2.4% range.
Going forward, the economy established by President Trump’s policies, will be even stronger, although there are a couple of concerns. One is the tight labor market.
Since the unemployment rate for virtually all demographics is at historic lows, there is a fear that economic growth could be reduced by the lack of available labor. The tight labor market will also cause wages to rise, which could result in higher inflation.
Fortunately, President Trump realized this when he structured his tax cut.
In many cases, labor can be replaced by capital, so the tax cut was geared to not just help the middle class, but to create more capital. That is why he lowered the tax rate for the highest income earners and for corporations. That is where new capital comes from.
The increased capital will also mean that business can invest in goods that make labor more productive. That means if wages increase by 3% but productivity also increases by 3%, then the labor cost does not increase, so there is no pressure to raise prices. And the productivity increase also means the economy is growing.
America’s consumers account for 72% of GDP. Consumers are feeling very confident meaning they will continue to spend. Their wages and total incomes are rising more than 3% annually while inflation is below 2%, so they have real increases in purchasing power. Consumers are also feeling wealthier since their savings and retirement accounts have significantly increased in value because of President Trump’s policies.
“The US is immune to shocks in the energy sector since Trump has made the US energy independent so any disruption in the Middle East will have a negligible negative impact on the US economy, in total, the economy looks good in Y 2020 and the years after that look even better,” ” Michael Busler, PhD.
Monday the major US stock market indexes finished at: DJIA -183.12 at 28462.05, NAS Comp -60.62 at 8946.02, S&P 500 -18.73 at 3221.29
Volume: Trade on the NYSE came in at 690-M/shares exchanged
- NAS Comp +34.8% YTD
- S&P 500 +28.5% YTD
- Russell 2000 +23.4% YTD
- DJIA +22.0% YTD
HeffX-LTN’s overall technical outlook for the US major stock market indexes is Very Bullish in here.
Looking ahead, investors will receive the S&P Case-Shiller Home Price Index for October, the FHFA Housing Price Index for October, and the Conference Board’s Consumer Confidence Index for December Tuesday.
Have a Happy New Year Week