The US economy is transitioning from a (temporary) phase in which growth was supercharged by fiscal stimulus, lower corporate tax rates and deregulation to a more sustainable growth phase as fiscal stimulus wanes in 2019 and 2020.
- US growth will slow from 3.0% in 2018 to around 2.25% in 2019
- Significant downside risks from the escalation in international trade tensions
- Easing financial conditions provide some offset to the damage done to business confidence
Indeed, one theme we are watching closely is the divergence between (relatively solid) hard economic data and declines in some leading indicators such as the ISM manufacturing index and its new orders sub-index. One surprise was that the first quarter US growth estimate printed at 3.1% annualised, far higher than the initial 1.5% ‘nowcasts’. But first-quarter output was somewhat buoyed by inventory building (perhaps as businesses stocked up ahead of the March 1 imposition of US tariffs on USD 200 billion of Chinese goods).
Looking at the sectoral breakdown of economic activity, it is clear that the decline in US Treasury bond yields and mortgage rates since November has buoyed residential investment and house purchase activity, which had faltered in the fourth quarter of 2018 and the first quarter 2019.
Exhibit 1: The decline in US Treasury bond yields since November 2018 buoyed the US property market in the second and third quarters of 2019
(Graph shows changes in the yield of the 10-year US Treasury bond for the period from 16/01/17 to 16/07/19)
Source: BNP Paribas Asset Management/Bloomberg as of 16/07/19
At the same time, GDP data suggests business investment has also held up, despite the softening in some business confidence surveys. The US consumer, meanwhile, seems to keep plodding onwards, with private consumption providing steady contributions to GDP growth.
The outlook – further tension in trade talks seems likely
Looking forward, while the Fed may have adopted a more supportive stance towards growth, the downside risks to growth from international trade have suddenly re-intensified.
In the first quarter, our view was that the US and China would reach an accommodation, as all signs pointed towards a deal. At this point, however, the two sides seem less likely to compromise and continued tension with occasional flare-ups seems more likely. The US will wish to avoid a full trade war heading into the 2020 election, while the Chinese may play for more time in case there is a change of administration.
This is an extract from the second quarter 2019 Inflation-Linked Bond Outlook, published on 12 July.
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